S-Corp Testifies on Michigan SALT Parity Legislation

March 4, 2021|

S Corporation Association President Brian Reardon testified this week – via Zoom – before the Michigan House of Representatives’ Tax Policy Committee. The subject of the hearing was H.B. 4288, which would permit electing pass-through businesses to pay their state and local tax (SALT) at the entity level, thus enabling them to fully deduct these expenses on their federal returns. Click the screenshot below for a video of Brian’s testimony:

Brian kicked off his testimony with a presentation (available here) on how Michigan taxpayers would benefit from enactment of H.B. 4288. He highlighted the fact that nearly 250,000 Michigan pass-through entities are currently paying higher taxes as a result of the SALT cap and walked through the mechanics of the SALT Parity bill which make it revenue neutral to the state.   According to previous analysis, Michigan pass-through businesses would save $190 million a year on their federal taxes, all at no cost to the state.

He also addressed the bill’s accompanying fiscal note, published by the Michigan House Fiscal Agency, which projected that implementation of H.B. 4288 would cost $8 to $10 million. Brian countered by offering real-world data from other states that have enacted SALT Parity reforms, including Maryland and Oklahoma, who have seen significantly lower implementation costs.

Some may remember that Michigan passed SALT Parity legislation back in 2018, but then-Governor Rick Synder vetoed the legislation in his last days in office, based on uncertainty about whether the IRS would strike down our approach. Now that the IRS has instead blessed SALT Parity, the state is making another run at the legislation.   If the initial bill had been adopted in 2018, Michigan businesses could have kept nearly $600 million over the last three years, money that instead was sent to Washington.

With the effects of COVID continuing to negatively affect businesses, it is time for Michigan and all the other pass-through states to adopt SALT Parity and help their Main Street businesses.

Main Street Supports 199A Permanence

February 26, 2021|

More than 80 business groups signed on to support legislation making permanent the 20-percent pass-through deduction (Section 199A). The bill was sponsored by Steve Daines (R-MT) in the Senate and Jason Smith (R-MO) and Henry Cuellar (D-TX) in the House.

The 199A deduction was a key part of the Tax Cuts and Jobs Act, enacted in 2017. The deduction was designed to balance out the tax treatment of pass-through businesses with the lower, 21-percent tax rate paid by C corporations. As our EY study from the time made clear, the deduction works to help level the playing field, but only for those business that get the full deduction.

The challenge is that the deduction is scheduled to expire at the end of 2025, at which time taxes on pass-through businesses will go up. To add insult to injury, while most of the individual provisions in tax reform – including the Section 199A deduction – expire beginning 2026, many of the revenue-raising provisions applied to the business community remain in place, including the new cap on interest deductibility and the repeal of the old manufacturing deduction.

The legislation introduced today would prevent this tax hike on Main Street businesses. It would also provide certainty to tens of thousands of businesses who have been hit hardest by the COVID-19 pandemic, and for whom the past year has been anything but certain.

The letter, led by our Main Street Employers coalition, makes the case for permanence and was signed by over eighty national trade associations, including the U.S. Chamber of Commerce, American Farm Bureau Federation, NFIB, and Associated General Contractors of America, to name a few. As it states:

Individually- and family-owned businesses are the backbone of the American economy – they employ the majority of private-sector workers and represent 95 percent of all businesses.  Despite the economic importance of the pass-through sector, however, Section 199A is scheduled to sunset at the end of 2025.

 These businesses have been hard hit by the COVID-19 pandemic and resulting shutdown policies.  According to Yelp’s Local Economic Impact Report, a majority of businesses closed during the pandemic will not reopen, while small business revenues overall have declined by more than 30 percent in the past year. 

You can read the entire letter here.

Talking Taxes in a Truck Episode 8 – “Process is as Important!”

February 25, 2021|

Tori Gorman, Policy Director for The Concord Coalition, joins our podcast to discuss the intricacies of the budget reconciliation process, its role in moving the latest Covid relief package, whether policies like a $15 minimum wage can be advanced through reconciliation, and what the upcoming fights over process mean for the tax outlook in 2021.

Our latest “Talking Taxes in a Truck” podcast was recorded on February 22, 2021, and runs 28 minutes long.

Editor’s Note: At 1:15, Brian incorrectly describes Tori’s past role at the Senate Budget Committee as “Counsel.” Her title on the committee was “Parliamentarian.”


COVID Bill Signals Tax Hikes to Come

February 22, 2021|

With impeachment over, congressional Democrats are turning their attention to their $1.9 trillion coronavirus relief bill. House committees spent prior weeks marking up pieces of the bill, which will be consolidated into a single “reconciliation” package by the Budget Committee today and then considered by the full House later this week.

For the Main Street business community, the process here is as important as the policy.  The congressional majority chose to use reconciliation to move their COVID relief package, which raises several issues worth highlighting.

Senate Rules Under Pressure

The primary benefit of using reconciliation in the Senate is the ability to pass a bill with a simple majority. But at least one provision in the House bill — the $15 minimum wage hike — appears to violate the Senate’s reconciliation rules, which prohibit “extraneous matters.”  Unless the majority takes out that provision, any Senator can raise a point of order against it and ask the Chair for a ruling.

Waiving the Chair’s ruling requires 60 votes.  As with the filibuster rules, however, the Chair’s ruling can be overturned — and a new Senate precedent set — by a simple majority vote using Rule XX.  That would open up the reconciliation process to all sorts of legislative initiatives – not just taxes and spending – and be akin to eliminating the filibuster in the Senate, only worse.  In this case, the benefit would accrue only to the majority, since they control the budget process.  The minority would still live in a world where they need 60 votes to move their priorities.  This is a big deal — not just for the prospects of the minimum wage, but for the future.

Senators Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ) made clear they would oppose killing the filibuster, but does their pledge extend to preserving the reconciliation rules too?  Does a pledge made in a vacuum still hold when there’s real policy on the table?  Manchin and Sinema oppose the minimum wage hike, so it may not be a good test.  Nonetheless, the upcoming reconciliation debate will be the first indication of how far Senate leadership is prepared to go, and how hard they are willing to push their members, to change long-standing Senate rules to enact their priorities.

Going Big

Congressional leadership has access to two budgets this year (Congress didn’t pass one last year) and therefore two reconciliation bills.  By using reconciliation on what could have otherwise been a bipartisan COVID package, they’ll only have one shot left this year to move legislation with a simple majority.  By all accounts, they plan to use that on a big infrastructure/climate/tax bill, with the emphasis on BIG.  According to the Washington Post:

“Senior Democratic officials have discussed proposing as much as $3 trillion in new spending as part of what they envision as a wide-ranging jobs and infrastructure package that would be the foundation of Biden’s ‘Build Back Better’ program, according to three people granted anonymity to share details of private deliberations. That would come on top of Biden’s $1.9 trillion relief plan, as well as the $4 trillion in stimulus measures under former president Donald Trump. Aides cautioned that the spending figures were highly preliminary and subject to change.  

“But unlike under Trump, when multiple efforts to address infrastructure faltered before getting off the ground, Biden is expected to take a big swing at the issue and package together funding for expanded broadband networks, bridge and road repairs as well as technology that reduces greenhouse gasses in a sprawling bill that threatens to enlarge to encompass multiple other issues as well.”

So this all suggests that the next reconciliation bill is going to be a very BIG bill, with many of the proposed policies rekindling the debate over what is and what is not allowed under reconciliation.  We expect the Senate’s history of needing 60 votes to pass legislation will again be under pressure.

Tax Outlook

What does this mean for tax policy?  Right now, the size of the tax title appears constrained by the following dynamics:

  • First, there appears to be a very real aversion among tax writers on both sides of the Capitol to large tax hikes at a time when the economy is struggling.
  • Second, Democratic Leadership appears only loosely concerned with offsetting any increased spending contained in the package. They would love to minimize the package’s deficit impact, but do not feel the need to cover it all.
  • Third, the Senate is evenly divided 50-50. Unless the Majority Leader can attract moderate Republicans to cross over and support the effort, he will need every single Democrat to support the package.  This means the most moderate Democrat will define the size and policies considered by the Senate.

Those dynamics, however, are countered by these:

  • As it is the last train, the BIG Bill will be seen as the best and perhaps only shot to enact numerous policies before the mid-term elections. Progressives in particular are going to push hard to include the Biden tax proposals and beyond.
  • The timing for this second package is uncertain. While consideration could happen as early as this spring, we’re hearing it could easily leak into the fall.  The longer it waits, the bigger its likely to get.
  • We have been inundated with reports on how big economic growth is going to be later this year. What is underappreciated is how much of this growth will be due to massive deficit spending by the federal government. The pending COVID bill and last year’s CARES Act will inject trillions into the economy this year, juicing growth significantly in a $21 trillion economy.  It may just be a sugar high, but a big GDP number in the second quarter could undermine concerns that large tax hikes would hurt the economy.
  • Finally, after 40 years of disinflation, deficit hawks may finally have some inflation signs to point to. If the 10-year continues its rise, it will give moderates ammunition that a higher percentage of the new spending needs to be offset.

All that suggests the tax title in the BIG bill is going to be robust, include a large portion of the Biden Tax proposals from the election, and maybe a little bit more.  As a reminder, here are the broad provisions in the Biden Plan (courtesy of the Eurasia Group):

As you can see, the Biden plan is sufficiently large to offset the entire $3 trillion infrastructure package anticipated by the Washington Post.  At this point, we’d guess about half that much is locked in – including most of the corporate tax hikes – and the longer we wait, the more provisions will get added.

What’s the “little bit more”?  Finance Chair Ron Wyden (D-OR) has been working on his “mark-to-market” approach on capital gains for several years, Senators Sanders (D-VT) and Warren (D-MA) will push their wealth tax, and there will be a strong, and perhaps bipartisan, push to include some sort of carbon tax.  Finally, the CARES Act NOL relief continues to be a lightning rod and, at least according to the JCT, would raise lots of retroactive revenue. None of these is likely to be enacted, but all will be debated.

In terms of effective dates, the longer Congress waits to act, the more likely the effective dates will be pushed back to date of introduction, date of enactment, or even next year and beyond.  Some policies might be made effective January 1 of 2020, but that is unlikely to include the capital gains or estate tax provisions.  For those members worried about raising taxes when we’re still in a pandemic, having them take effect is the future is an obvious solution.


So expect the next reconciliation bill to be big.  It will be viewed as the last train out of town and everybody will want to catch a ride.  The bill should include a tax title that both addresses the demands of progressives to raise taxes on big corporations and the wealthy, and the need to at least partially offset the new spending included in the bill. That would suggest a big tax title.

Will it pass?  We will have to see, but the private business sector faces two distinct threats.  First, an erosion of the Senate rules that would open the reconciliation process to more types of legislation and, second, a tax title that will raise rates on pass-through income, business sales, and estate taxes.  More on this in the coming weeks.

Business Community Rallies to Defend NOL Relief

February 5, 2021|

On February 2nd – Groundhog Day, appropriately enough – dozens of Senators and Representatives called on Speaker Nancy Pelosi and Senate Majority Leader Chuck Schumer to retroactively repeal the net operating loss (NOL) relief included in last year’s CARES Act.

Their letter claims the NOL relief was a “special-interest” giveaway that was “tucked” into the CARES Act.  Neither of these claims is true, as made clear in the most recent business community letter released today and signed by more than 80 trade associations.  The provision was requested by the business community, it was widely discussed and understood prior to any votes in the House or the Senate and, far from being targeted at special interests, the relief it provides is broad-based and available to all businesses who lost money in the past three years.

Here is the comprehensive response from the business community:

A recent letter signed by dozens of U.S. Senators and Representatives called on Congress to retroactively repeal last year’s Net Operating Loss (NOL) relief enacted in the CARES Act.  This ill-advised effort would result in a massive, retroactive tax hike on thousands of businesses who, by definition, have suffered losses in recent years and need help during the pandemic.  It should be rejected by the both the House and the Senate. 

The CARES Act included a 5-year carryback for losses incurred in 2018, 2019, and 2020.  It also suspended the loss limitation rules for those years.  Absent the loss limitation relief, pass-through businesses with large losses would have been unable to access the NOL relief.  With small business revenue declining by 30 percent in the past year, this provision was necessary to ensure businesses of all sizes benefitted from the policy. 

Providing temporary NOL relief has broad support in the business community.  One-hundred and twenty national business trade groups called on Congress to include it in the response to the COVID-19 pandemic.  It was part of the CARES Act negotiations from the beginning and it was included in every CARES Act draft leading up its adoption.  There is simply no truth to the notion that this provision was “snuck” into the legislation. 

Nor is it true that this policy is something new.  NOL relief enjoys a longstanding history of bipartisan support during economic crises.  The “alternative” bill authored by Speaker Nancy Pelosi last spring included five-year carrybacks of net operating losses, as did the Worker, Homeownership, and Business Assistance Act of 2009, the Gulf Opportunity Zone Act of 2005, and the Job Creation and Worker Assistance Act of 2002.  All of those bills were supported by bipartisan coalitions and were adopted by the House and Senate with overwhelming majorities.  As President Obama’s press office summarized the 2009 provision: 

“The bill provides an expanded tax cut to tens of thousands of struggling businesses, providing them with the immediate cash they need to pursue an expansion or avoid contracting or furloughing their workers…Business losses incurred in 2008 or 2009 can now be used to recoup taxes paid in the prior five years. This provision is a fiscally responsible economic kick-start, putting $33 billion of tax cuts in the hands of businesses this year when they need it most, while enabling Treasury to recoup the majority of that funding in the coming years as these businesses regain their strength and resume paying taxes.”

A key reason NOL carrybacks have long enjoyed bipartisan support is highlighted in the Obama Administration’s statement – any tax benefit realized by businesses suffering losses will result in higher tax payments for those businesses in the coming years.  The goal of the policy is to level out tax burdens to reflect the long-term income of the businesses. 

Finally, repeal of the temporary NOL and Loss-Limitation relief will not “save $250 billion” as the letter asserts.  The Joint Committee of Taxation estimated NOL relief would reduce revenues by $161 billion over ten years, and even that estimate is likely overstated.  NOL carrybacks provide a timing benefit only, as deductions taken this year are no longer available next year.  Reversing this policy will not generate nearly $100 billion in additional savings.  Instead, the policy being advocated in the letter would not just impose a retroactive tax hike on businesses suffering losses, but also extend that tax hike beyond the current sunset of the loss limitation rules beginning after 2025.

The undersigned business organizations ask that you stand by the business community during this difficult time and reject imposing a massive, retroactive tax hike on businesses that have lost money in recent years.  Providing businesses with temporary NOL relief has a long history of bipartisan support, it has been enacted during every economic downturn in recent memory, and the provision in question only applied to tax year 2020.  The policy has already sunset.

Thank you for your consideration of our views and for defending businesses during the pandemic. 

This letter continues an almost year-long campaign to rewrite the legislative history of the CARES Act and to, at this point, retroactively increase taxes on businesses suffering losses in the pandemic.  The leaders in both the House and the Senate should reject this effort and stand by the Main Street business community.

View the Washington Wire Archives