Here's what Sen. Ron Johnson (R-Wisc.), the first Republican to oppose the Senate tax bill, doesn't like about the measure: It would slash tax rates for conventional corporations and give a much smaller tax cut to firms like the four in which he has millions of dollars in investments.
Johnson’s office says he does not support the Senate bill because it would roughly double the gap between corporate tax rates, which would drop to 20 percent, and the individual income tax rates paid by people receiving income from what is known as a “pass-through” entity. Those rates would drop to a top rate of 31.8 percent, from 39.6 percent.
Pass-through entities — S corps, partnerships and limited liability companies — are frequently small businesses, from dry cleaners to lawyers to dentists. And small business associations, traditionally Republican-leaning, pay special attention to these entities. But pass through businesses can also be very large, including National Football League teams, Fiat Chrysler, a Koch Industries subsidiary, and big liquor distributors.
Tax experts say that widening the gap between the tax treatment of different companies would skew investment decisions and create incentives for gaming the system. Johnson has said it would also worsen the competitive position of pass through firms.
Johnson himself has invested in in four limited liability corporations that in 2016 threw off pass through income of at least $250,000 and as much as $2 million, according to his financial disclosure materials.
He and his wife Jane own 100 percent of a piece of commercial real estate in Oshkosh, Wisc. The senator’s disclosure forms estimate that it is worth between $5 million and $25 million.
The Johnsons rent the space to Pacur LLC, an Oshkosh-based manufacturer of plastic items including medical and food packaging and polyester sheets. The senator also owns a 5 percent stake in Pacur. The senator’s stake is worth between $1 million and $5 million, the disclosure says.
He also owns a relatively small piece of a real estate investment trust and a land developer, according to his disclosure filings. Both of them are pass-through entities.
It’s not clear how any fix to address his concerns in the GOP tax bills would affect him personally. President Trump and the Senate leadership insist on sticking to the 20 percent rate for corporations. So closing the gap with pass throughs would therefore further mean reducing rates for those firms, including those Johnson owns.
At the same time, however, for several months Johnson has been floating his own proposal to radically reshape the business tax system. It is a tax simplification plan that would treat all corporations alike — and leave the tax treatment of his limited liability firms unchanged.
Under Johnson’s plan, there would be no corporate business tax and taxes on corporate profits would be paid by shareholders at their own individual income tax rates. An aide to the senator said it would equalize the playing field for all American business and that it would have no financial effect on any pass-through business, including his own.
Supporters say Johnson’s plan would eliminate what they call double taxation of corporate profits; critics say the Treasury would lose lots of revenue and that it isn’t politically or technically feasible. That sort of “simplification is out the window,” said Martin Sullivan, chief economist of Tax Analysts.
In the absence of such an overhaul, Johnson has been zeroing in on flaws in the fine print of the Senate and House GOP tax bills.
The House plan would trim the pass through tax rate to 25 percent, but only for certain amounts of income and only for certain types of firms. The bill would block service providers — dentists, dry cleaners, massage therapists, lawyers, accountants and others — from any rate cut at all. They would continue to pay individual rates as high as 39 percent. Big businesses would benefit though.
The Senate version effectively lowers tax rates for pass through income by handing out deductions. Sullivan of Tax Analysts estimates that under the Senate bill the top earners would pay a 31.8 percent rate on pass through income, well above the proposed 20 percent corporate rate but below the Senate’s proposed new top rate of 38.5 percent on ordinary individual income.
However, the Senate’s deductions would phase out for the wealthiest individuals. And, as in the House version, the Senate would not apply lower tax rates to service providers, which it defined as “any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees.”
Much is left to interpretation. “This ain’t simplification. This is a nightmare,” Sullivan said. “The accountants are going to make a fortune.”
Part of Johnson’s concern about pass-through corporations may have something to do with his home state of Wisconsin, which relies heavily on manufacturing, much of it in the form of pass-through entities. In 2015, 16.4 percent of the state’s non-farm employment was manufacturing employment, the second highest share of any state in the country. Ninety-two percent of the manufacturing firms, with nearly half of those workers, have fewer than 500 employees.
“Wisconsin is packed with small manufacturers,” said Sullivan.
In 2016, Johnson made a splash with a campaign ad showing him, felt tip marker in hand, before a white board with a drawing of the Capitol and tallies for how many senators were lawyers (54), career politicians (“way too many”) and manufacturers. “One manufacturer, that’d be me,” he said, saying he had “the perspective” to solve problems.
But while most lawmakers associate pass-through corporations with small enterprises, a small number of big firms account for the overwhelming majority of income. In Wisconsin, subchapter S corporations, partnerships and limited liability corporations generated $11 billion, but 92 percent of that went to people earning more than $200,000. And people earning more than $1 million a year received more than half of the income, according to Sullivan, citing government statistics.
The National Federation of Independent Business, which objected to the treatment of pass-through income in the initial House tax bill, has endorsed the Senate proposals. On Nov. 9, NFIB president Juanita Duggan said “it includes real tax relief, allowing small business owners to keep more of their money to invest in growth and create new jobs.”
John Arensmeyer, chief executive and founder of Small Business Majority, said that the Senate bill provisions on pass through income took “a small step toward helping people at the bottom,” but he said he still opposes an overall tax cut and the rush to pass a measure as complicated as tax reform.
As for Johnson’s proposal to tax all corporate profits as pass-through income, Arensmeyer said “we don’t think that’s the way to go. And if we were to consider something that radical, it would require a lot more time and analysis. At the end of the day we would want to make sure the benefits are flowing through to Main Street small businesses.”
Damian Paletta and Mike DeBonis contributed to this article.