In June, the Senate Budget Committee held a hearing to discuss tax reform, including the future of the 2017 TCJA tax cuts. Surprisingly, there was significant bipartisan support for proposals such as tightening rules on carried interests, ending the step-up in basis for estates and adjusting the tax disparity between C Corporations and S Corporations.

With the partisan-leaning name of the hearing, “Making Wall Street Pay Its Fair Share: Raising Revenue, Strengthening Our Economy,” Committee Chair Sheldon Whitehouse (D-RI) and Ranking Member Chuck Grassley (R-IA) briefly sparred in their opening statements. Whitehouse called for passage of three bills that would: 1) end tax breaks for outsourcing (S. 357); 2) impose a minimum tax on multimillion-dollar earners (S. 1173); and 3) extend the payroll tax on wages, self-employment income and investment income to taxpayers with earnings exceeding $400,000 to fund Social Security and Medicare (S. 1174).

Grassley countered that there needs to be “a bipartisan consensus for action and understanding issues that often can’t be boiled down to Wall Street versus Main Street.” Grassley argued that most Americans, not just the wealthy, own stock, either directly or through their retirement plans. He supports closing “abusive tax loopholes” and pointed to the Republicans’ success with extending the holding period for carried interests in TCJA. ”I’m all for examining perceived loopholes and looking for ways to improve the fairness of our tax code,” Grassley assured the Committee.

Witness Testimony Mixed

The Committee heard from three witnesses, including Columbia University economics professor, Joseph Stiglitz, who advocated for taxing unrealized capital gains at death. Senator Mitt Romney (R-UT) agreed, opening with the general principle that Congress must look at both spending and taxes. He commented that elimination of the tax-free, step-up in basis at death “probably makes sense.”  Stiglitz also called for getting special interest provisions out of the Code, such as large tax subsidies for fossil fuels, real estate and debt financing.

Sarah Anderson, of the Institute for Policy Studies, asserted that financial institutions and executives are not contributing their fair share to the cost of public investments needed for a strong economy. She said Congress should enact further changes to the treatment of carried interests, including: the Carried Interest Fairness Act (S. 4123), which would require carried interest income to be taxed at ordinary income tax rates; or Ending the Carried Interest Loophole Act (S. 3317), which would tax carried interest at ordinary income rates and also prevent fund managers from deferring payment of taxes on wage-like income. She also pushed U.S. adoption of the OECD global minimum tax and a tax on high-volume financial transactions.

Rather than backing off on the TCJA tax cuts and imposing new taxes, Senator Ron Johnon (R-WI) wants to take some of TCJA’s ideas a step further. In 2017, he proposed taxing all business income at the ownership level, what he calls his “True Warren Buffet tax,” a move would simplify the tax code and level the tax rates for all businesses. Johnson said this plan currently is being revenue-scored by the congressional Joint Tax Committee. Additionally, Johnson observed that Senate Finance Committee Chair Ron Wyden (D-OR) is interested in the proposal. Johnson argued that this change would stop the “locking up of unrealized profits in C Corps.” Johnson warned that if the tax Code reverts back to 2016 law in 2026 as it is scheduled to do, it would put passthrough businesses at a disadvantage because the lower C Corporation rate of 21% would remain while the qualified business income (QBI) deduction would sunset.

University of Maryland Professor of Finance Michael Faulkender, who formerly was Assistant Treasury Secretary for Economic Policy, was asked to comment on Senator Johnson’s proposal. He agreed that choosing one type of corporation over another solely for tax purposes leads to “distortions.” He also said he is in favor of taxing all income uniformly. His written testimony did not address this issue and instead focused on the general idea that increasing taxes on corporations and investors and taxing unrealized capital gains would hurt capital investment.

Observations

While these tax reform hearings may not lead to immediate legislative action, they reveal the negotiating positions of each side on extension of the TCJA provisions, which expire after 2025. As is known in the legal world, successful business negotiations start with identifying the “zone of possible agreement.” The Senate Budget Committee hearing gave us insight into that zone with their discussion of eliminating the estate stepped-up basis, taxing carried interests as ordinary income and new ideas for the treatment of corporate and passthrough income.

Lucia Nasuti Smeal is a guest writer on tax topics for Frazier & Deeter. Smeal is an attorney, an adjunct tax professor with Georgia State University’s J. Mack Robinson College of Business and with Franklin University, and former editor of Tax Notes Today, published by Tax Analysts. Smeal also worked as a legislative analyst for the Congressional Research Service and is a former member of the U.S. House Periodical Press Corps. She is a frequent speaker and writer on current tax developments.