Senators debate new business deduction, debt in tax law hearing

Senators sparred over the new tax law’s deduction for pass-through businesses and its impact on the national debt in a Finance Committee hearing on the new measure Tuesday.

Republicans cheered the new law, including the pass-through provision, arguing that it is helping to spur greater economic growth. One of the law’s major provisions is a 20 percent deduction for income from pass-through businesses — noncorporate businesses that have their income taxed through the individual code. Pass-throughs include many small businesses, as well as larger firms.

Republicans included the deduction because they were also cutting the tax rate for corporations and wanted to create parity between different types of businesses.

But Democrats said the deduction largely benefits the wealthy and is difficult for small businesses to understand and use properly.

Democrats blasted the provision following a Joint Committee on Taxation report that found that a sizable percentage of the deduction’s benefits go to those making at least $1 million.

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Senate Finance Committee ranking member Ron Wyden (D-Ore.) said that in the eastern part of his state, “when you think of Main Street, you don’t think of millionaires.”

Democrats also criticized the pass-through deduction’s complexity. In order to prevent wealthy individuals from using the deduction to avoid taxes, certain types of businesses that meet an income threshold don’t qualify for the deduction.

“This is the most complicated thing that has been added to the tax code, I would say, in generations,” said Sen. Claire McCaskill (D-Mo.), one of the most vulnerable Democrats in the midterm elections.

Sens. Ben Cardin (D-Md.) and Bill Nelson (D-Fla.), both of whom are up for reelection this year, acknowledged the intent behind the pass-through deduction but still raised concerns about the law. Cardin said he understood a desire to cut taxes for small businesses, as well as corporations, but that it may be challenging for small companies to use the deduction. Nelson criticized the large size of the cut in the corporate tax rate, which went from 35 percent to 21 percent.

Meanwhile, Republicans defended the pass-through deduction, saying it’s benefited many small businesses.

Sen. John Thune (R-S.D.) said the deduction “holds enormous potential for growth that we’re just starting to see.”

Sen. Rob Portman (R-Ohio), said that “all over Ohio, small businesses are benefiting from this.” He noted that the smallest pass-through entities aren’t subject to much of the complexity associated with the deduction, and said that many small business owners making $1 million per year may not be that wealthy.

One witness, western Pennsylvania small-business owner David Cranston Jr., said his business is benefiting from the pass-through tax break.

“For many small pass-through businesses like mine, the Tax Cuts and Jobs Act provides us with substantial help in accumulating capital in order to grow,” said Cranston, who was representing the National Federation of Independent Business.

Democrats also criticized the bill for its impact on the debt. The law has been estimated to add more than $1 trillion to the debt over a decade.

“It’s truly stunning, this kind of fiscal irresponsibility,” McCaskill said.

But Portman said if the tax law works as it’s intended to, it will boost economic growth enough for the tax law to pay for itself.

“If you have only 0.4 or 0.5 percent more economic growth [over a decade] compared to what you would have had, then this thing does not add to the deficit, and that’s what I think is going to happen,” he said.

Wyden and Senate Finance Committee Chairman Orrin Hatch (R-Utah) also debated the extent to which Democrats were welcomed into Republicans’ process of crafting the tax law.

Hatch called a letter 45 Senate Democrats sent last summer outlining prerequisites for tax reform a “legislative ransom note.” But Wyden said Democrats wrote in that letter that they wanted to work with Republicans on rewriting the tax code.