Legislation

Analysis | The Finance 202: Sen. Johnson and small business groups have concerns about tax package. But they may support it anyway.

THE TICKER

Is Sen. Ron Johnson (R-Wis.) really ready to deliver a decisive blow against the GOP tax plan? 

The question for the Wisconsin Republican, and a handful of other holdouts, is growing more acute as the zero-hour for Senate floor consideration of the tax bill approaches.

Officially, Johnson still opposes the measure for its treatment of so-called pass-through businesses. On Tuesday, he showed flashes both of defiance and conciliation — clashing with President Trump behind closed doors over his objections, then helping the measure clear a critical hurdle by voting it out of the Senate Budget Committee on which Johnson sits.

The situation remains fluid. A series of developments Tuesday broadly signaled building momentum behind a package speeding to the floor. Yet it still lacks majority support.

Johnson’s evolution helps explain where we are. Two weeks ago, he became the first Senate Republican to come out against the measure, pointing to its treatment of  businesses from mom-and-pop shops to law firms and hedge funds that pay their taxes through the personal side of the code. He says that his party’s proposal gives them short shrift relative to corporations. 

Lobbying groups representing those businesses agree. More than three dozen of them signed a letter to Senate Finance Committee Chairman Orrin Hatch (R-Utah) on Monday outlining their concerns, writing that if the Senate bill passes unchanged, it will add to their tax burden while creating a “significant competitive disadvantage” for them against corporations reaping a major rate cut. 

The National Federation of Independent Business, which bills itself as the nation’s leading small-business association, didn’t sign on (the group, whose typical member employs 10 workers, has endorsed both the House and Senate tax bills after initially opposing the House one).

But a potent array of other Republican-friendly trade groups representing larger pass-through businesses did. That roster includes the Associated Builders and Contractors, the Independent Community Bankers of America, the International Franchise Association, the National Association of Wholesaler-Distributors, the National Beer Wholesalers Association and the National Grocers Association. They listed criticisms: The 17.4 percent deduction the bill offers their members is too low and temporary; it limits that break to half the amount the firm shells out in wages, if that sum is lower than the deductible income; and even with the full write-off, pass-throughs would face a 32 percent effective rate, much higher than the 20 percent rate corporations would enjoy. 

Yet when I called around to some, none  of those who signed the letter said they would oppose the bill if changes aren’t made. Like most business groups, even those with decidedly mixed feelings about the tax proposals, they want to remain in the family and at the table.

Whether Johnson will mirror their calculus isn’t yet clear. He voted Tuesday in lockstep with fellow Republicans on the Senate Budget Committee to send the tax package to the floor, citing his desire to “make sure this process moves forward.” Yet Johnson doesn’t feel much fealty to GOP leader Mitch McConnell (R-Ky.), as my colleague Erica Werner reveals by peeling back their messy recent history:

“’What I think is important to understand is how much [Johnson] detests Senate leadership,’ said Charlie Sykes, a longtime Milwaukee-area conservative radio host who is deeply plugged in with Wisconsin Republicans. ‘I do think a lot goes back to last fall when they left him by the side of the road politically dead. Very liberating for him.’

When polling showed Johnson trailing Democrat Russ Feingold, GOP campaign operatives allied with McConnell (R-Ky.) turned off the money and channeled it into states such as Indiana and Missouri that appeared to have more winnable Senate races… In the final weeks, the McConnell-allied Senate Leadership Fund had gotten into the race with millions to help Johnson. But it was too late to convince the lawmaker that the party had his back, as he privately fumed to associates that he had been abandoned and had had to win on his own. ..

The lingering tension exploded Tuesday when Johnson clashed with Trump during a closed-door Capitol meeting of Senate Republicans. Johnson stood up to complain that he understood business and figures better than others in the Senate, but that no one listened to him, according to several GOP officials in the room or briefed on the exchange. Johnson angrily asserted that ‘this body’ doesn’t understand numbers, the sources said.

Trump returned fire with fire, telling Johnson, ‘You don’t get to vote ‘no’ for a stupid reason like that.’ Then Johnson complained that no one would talk to him about the negotiations, to which Trump said he has called him and talked to him. ‘You’re the only one,’ Johnson said in a thinly veiled shot at McConnell… The extraordinary exchange with Trump took some fellow GOP senators aback as the depths of Johnson’s anger became clear. And it left some GOP leaders and aides questioning whether Johnson could ever get to “yes” on the tax bill, even though as a conservative businessman he would seem to be a natural constituency for the legislation.

‘It’s a big number, it’s north of a hundred billion,’ Sen. John Thune (S.D.), the third-ranking Senate Republican, said of the changes Johnson is seeking.”

The provisionally encouraging news for GOP brass is they may not need him. Elsewhere yesterday, the bill looked to be on the march, as other Republican undecideds signal their interest in getting behind the measure despite misgivings.

Sen. Bob Corker (R-Tenn.) also backed the bill in the Budget Committee, citing a deal he struck with leaders to limit its deficit impact (although this vague pact has unleashed a wave of opposition from conservative groups and could cause a bigger headache for the GOP). Sen. Susan Collins (R-Maine) huddled privately with Trump before the lunch and emerged sounding hopeful about her top issues, namely protecting federal subsidies to make health insurance more affordable and preserving some of the deductibility of property taxes. “Everybody said the same thing,” Sen. Mike Rounds (R-S.D.) said after a lunch, per the Wall Street Journal’s Richard Rubin and Kristina Peterson. “They all said, ‘We want to get to yes. We want to get to yes.’ ”

Senate Republicans aren’t all there yet, but they appear to be getting closer. 

MARKET MOVERS

Powell signals continuity. NYT’s Binyamin Appelbaum: “Jerome H. Powell, nominated by President Trump to lead the Federal Reserve, presented himself as a pragmatic moderate who would largely continue the Fed’s current policies at a confirmation hearing before the Senate Banking Committee on Tuesday. Mr. Powell, a Fed governor since 2012, defended the Fed’s approach to financial regulation. He told Democrats that he saw no need for stronger rules, and he told Republicans he did not favor rolling back most existing ones, though he did endorse easing the burden on smaller banks. Mr. Powell also pledged to continue the Fed’s current approach to monetary policy, by gradually raising interest rates so long as economic growth remains healthy. He stopped just short of confirming that the Fed intends to raise its benchmark interest rate in December, a move that is widely expected by financial investors.”

The Zen of Jerome. NYT’s Gina Chon: Powell “has put his mastery of the central banking arts on display. [He] breezed through his Senate confirmation hearing on Tuesday with Zen-like confidence. He dodged the debate on tax overhaul, kept comments about rate increases comments predictable, backed Fed independence and defended its review of bank rules… He also avoided political pitfalls. Democrats repeatedly tried to force him to make negative comments about the Republican tax cut plan, which would add about $1.5 trillion to the deficit over 10 years. Mr. Powell said he was generally concerned about the country’s growing debt burden, but he had no opinion about the tax proposal and said it was not the Fed’s job to score fiscal policy. Instead, Mr. Powell made comments about Fed policy that would surprise no one.”

Good for banks. CapAlpha’s Ian Katz: “The signals were unsurprisingly positive for banks since Powell reiterated his support for moderate easing of Dodd-Frank rules and a gradual increase in interest rates… He’s supportive of the framework of the SIFI relief bill[capalphadc.com] proposed by a bipartisan group of senators, though he said the Fed will offer ‘technical’ input. His preference is to continue having ‘meaningful’ stress tests for banks with $100 billion to $250 billion in assets because he sees the exams as a useful tool. He seemed OK with the idea of ditching stress tests for the sub-$100bn banks

He said he didn’t think there are any ‘too-big-to-fail’ banks. It’s the kind of comment that will likely prompt follow-up questions, especially from Democrats. But TBTF is such an imprecise term that Powell’s answer isn’t very instructive. Does it mean he doesn’t think any of the large U.S. banks could fail? Does it mean he thinks one of them could fail without bringing down the financial system? Does it mean he thinks that if one of them were in danger of failing the federal government wouldn’t need to bail it out? Powell also reiterated his general support for the orderly liquidation authority, though it wasn’t a full-throated endorsement.”

North Korean threat gathers. WSJ’s Jonathan Cheng: “North Korea said Wednesday that it fired a brand-new intercontinental ballistic missile into the waters off Japan, ending a more than two-month hiatus by Pyongyang and threatening to ramp up tensions with the U.S. and in the region. In a nationally televised broadcast, North Korea’s state television said that it had successfully fired a more advanced ICBM, which it dubbed the Hwasong-15 and which it said was capable of reaching any point on the U.S. mainland, in a launch personally ordered by leader Kim Jong Un.

Mr. Kim was quoted by state media as saying that, with the success of the new missile, ‘We have finally realized the great historic cause of completing the state nuclear force.’ Independent experts said that the launch sent a North Korean missile higher than ever before, demonstrating a trajectory that could put Washington, D.C., in range. It triggered an unusually robust reaction from South Korea, which quickly responded with a battery of missile launches of its own.”

Trump administration reaction, via The Post’s Anna Fifield: “Trump, together with his counterparts in South Korea and Japan and the U.N. secretary general, condemned the latest launch. ‘We will take care of it,’ he told reporters at the White House, calling it a ‘situation we will handle.’ A growing chorus of voices in Washington is calling for serious consideration of military action against North Korea, although this is strongly opposed by South Korea, where the Seoul metropolitan region — home to 25 million people — is within the range of North Korean artillery. And Secretary of State Rex Tillerson said Tuesday that ‘diplomatic options remain viable and open, for now.’ He added: ‘The United States remains committed to finding a peaceful path to denuclearization and to ending belligerent actions by North Korea.'”

Shares of financial companies got a boost after Jerome Powell indicated the Federal Reserve was likely to raise short-term interest rates next month. The Senate Budget Committee also advanced the Republicans’ tax bill Tuesday afternoon, sending all three major indexes toward intraday peaks and a new round of closing records.

WSJ

MONEY ON THE HILL

TAX FLY-AROUND:

Corker’s trigger. This issue has the potential to blow things wide open and should be watched very closely today. WSJ’s Siobhan Hughes: “Senate Republicans have agreed in principle to a mechanism that would trigger automatic tax increases if their assumption tax cuts will pay for themselves turn out to be wrong. Working out which taxes would increase—and whether to allow for automatic tax cuts in the event of higher-than-expected revenues—is proving harder. ‘We’re talking about a whole range of possibilities,’ said Sen. John Cornyn (R-Tex.). ‘We haven’t decided on how that trigger would work.’ 

The debate is taking Republicans deeper into the politics of business, the personalities of the Senate, the chamber’s procedures, and even into probability theory, each of which is playing a role as Senate GOP leaders seek to lock down support from  a trio of Republicans who are worried about the potential for tax cuts to fuel new budget deficits. The subject is contentious, especially among business groups that worry their taxes would suddenly rise in the event the Treasury’s coffers weren’t as full as hoped. The business argument is that companies will hold back on investment and hiring without certainty about future tax levels.”

Outside opposition from the right: The U.S. Chamber of Commerce opposes the move, calling it a “terrible idea,” as does the Koch-backed Americans for Prosperity. Brent Gardner, chief lobbyist for that group, says it “would add unnecessary complexity and uncertainty into the tax code, stifle the economy and generate less revenue.”

NYT’s Binyamin Appelbaum, on the some Republicans’ resistance to the trigger concept: 

A scoring grenade? The Post’s Heather Long: “The nonpartisan Joint Committee on Taxation plans to release a final estimate of the Senate bill’s impact on the debt as early as Wednesday night. When it does, the deficit hawks who hold the bill’s fate in their hands will be watching closely. ‘To me the big issue is how are we dealing with debt and deficit? Do we have realistic numbers?’ Sen. James Lankford (R-Okla.) said Monday. Lankford is one of at least four senators who have expressed major unease with how much the tax-cut bill will add to the nation’s $20 trillion debt…

Republican leaders planned to vote without waiting for the JCT’s dynamic score. That’s what happened in the House when the JCT said it didn’t have enough time to prepare a final estimate. But the JCT is rushing to get one done before the Senate vote… Almost everyone agrees the JCT won’t show that the bill generates enough growth to fully pay for itself. The question is what the final JCT price tag will be — will it be closer to $1 trillion or $2 trillion? … 

The JCT gave a hint in its letter to Wyden, and it doesn’t sound good for Republicans trying to brush off debt concerns. Barthold said the growth estimate will “assume an aggressive Federal Reserve response,” meaning the JCT thinks interest rates are likely to be a lot higher if the tax bill passes. That increases the costs of repaying the debt, sending the total price tag even higher.”

Sen. Jerry Moran (R-Kan.) is a Yes, per the NYT’s Thomas Kaplan: 

— Keep up with The Post’s official whip count here. And Politico has this look at nine key Republican senators and what they want from the bill.

Swing Dems oppose. The Post’s Dave Weigel: “For a short while, some progressives worried that [Sen. Joe] Manchin [D-WVa.], and perhaps Sen. Heidi Heitkamp (D-N.D.) and Sen. Joe Donnelly (D-Ind.) would break and give Republicans some bipartisan cover. Those three Democrats, widely seen as the most vulnerable in 2018, had backed Neil M. Gorsuch’s Supreme Court nomination; they had played ball with Trump when he delivered speeches in their states, with Heitkamp even joining him on Air Force One. For weeks, they participated in talks with the White House, reporting back positively on what they’d discussed.

But to progressives’ delight, the White House never brought the red state Democrats on board. The problem was simple: White House negotiators would sound open to what the Democrats suggested, and then House and Senate Republicans would rush ahead with completely different ideas.”

Sen. Mark R. Warner (D-Va.) said Senate Republicans are trying to enact a “totally deficit-financed tax package:”

Bloomberg’s Steven Dennis:

CEOs aren’t helping. Bloomberg’s Toluse Olorunnipa: “Major companies including Cisco Systems Inc., Pfizer Inc. and Coca-Cola Co. say they’ll turn over most gains from proposed corporate tax cuts to their shareholders, undercutting President Donald Trump’s promise that his plan will create jobs and boost wages for the middle class. The president has held fast to his pledge even as top executives’ comments have run counter to it for months. Instead of hiring more workers or raising their pay, many companies say they’ll first increase dividends or buy back their own shares.

Robert Bradway, chief executive of Amgen Inc., said in an Oct. 25 earnings call that the company has been ‘actively returning capital in the form of growing dividend and buyback and I’d expect us to continue that.’ Executives including Coca-Cola CEO James Quincey, Pfizer Chief Financial Officer Frank D’Amelio and Cisco CFO Kelly Kramer have recently made similar statements.”

SHUTDOWN SHOWDOWN:

Trump, Dems trade insults. The Post’s Ed O’Keefe and Sean Sullivan: “Trump and top lawmakers Tuesday failed to craft the outlines of a spending agreement as Democrats backed out of a planned meeting at the White House amid growing acrimony over a slate of year-end legislative priorities, with a potential government shutdown looming over the negotiations. The impasse all but ensures another holiday-season standoff over legislation designed to keep the government open and that also is expected to settle complex issues regarding immigration and health care.

Failure to act in the coming days could bring a partial shutdown of government operations, jeopardize health-care services for 9 million children and 370,000 pregnant women nationwide, and further complicate the fate of hundreds of thousands of children of illegal immigrants, known as dreamers, who could start facing deportation in early March… The breakdown in talks between Trump and Democrats will put more pressure on Senate Majority Leader Mitch McConnell (R-Ky.) and House Speaker Paul D. Ryan (R-Wis.), who both attended the White House meeting, to find a way forward on spending negotiations while they also race to wield their majorities to try to pass a sweeping tax bill this month.”

Here was the tweet from Trump that compelled Senate Minority Leader Chuck Schumer (D-N.Y.) and House Minority Leader Nancy Pelosi (D-Calif.) to cancel their plans to attend the White House meeting:

Here was the resulting visual, as stage-crafted by the administration, via Bloomberg’s Jennifer Epstein:

Another view from IJR’s Haley Byrd:

Here was Pelosi’s reaction:

And Trump’s Tuesday night follow-up:

THE REGULATORS

Mulvaney wins first legal round. The Post’s Renae Merle and Tom Heath: “A federal judge on Tuesday refused to block President Trump’s pick to be the temporary leader of the Consumer Financial Protection Bureau, denying a request by a high-ranking agency employee that she be put in charge instead. In turning down Leandra English’s request for a temporary restraining order, U.S. District Judge Timothy J. Kelly acknowledged that the case raised constitutional questions, but he ruled that White House budget director Mick Mulvaney can remain acting CFPB director. Former CFPB litigation counsel Deepak Gupta, representing English, said they would weigh their options to resolve an issue they say has left the six-year old agency and its 1,600 employees in legal limbo.”

Already making his mark: “Even before the decision, Mulvaney was moving aggressively to reshape an agency he has criticized in the past. On his first day in the office, he announced a 30-day freeze on the issuance of new rules and hiring. On Tuesday, he started a new Twitter account — @CFPBdirector — and posted a picture of himself at a desk with an American flag in the background. ‘Busy day at the @CFPB. Digging into the details,’ the tweet said. On the agency’s website, Mulvaney is now listed as director with a note that says ‘Bio coming soon.’ ‘Anyone who thinks that a Trump administration CFPB would be the same as an Obama administration CFPB is simply being naive,’ he told reporters Monday. ‘Elections have consequences at every agency, including the CFPB.'”

Possession is nine tenths and all that, via Bloomberg’s Joe Weisenthal:

Trump’s CFPB short list. Politico’s Lorraine Woellert: “With the legal skirmish quieted, Trump is close to placing a permanent leader at the agency, a senior administration official told POLITICO. The president’s short list of candidates includes House Financial Services Chairman Jeb Hensarling (R-Texas), George Mason University law professor Todd Zywicki, and former acting Comptroller of the Currency Keith Noreika. All are fierce critics of the bureau, which they have accused of overstepping its authority and running roughshod over industry. Other rumored candidates, including Rep. French Hill (R-Ark.), former Rep. Randy Neugebauer of Texas, Sen. Luther Strange (R-Ala.), lawyer Jerry Buckley of Buckley Sandler, former Florida Attorney General Bill McCollum, and Mark Calabria, chief economist to Vice President Mike Pence, are not in the running, the official said.”

Fact-checking GOP’s CFPB claims. CNN Money’s Matt Egan: “Mick Mulvaney, the official Trump installed as the agency’s acting director, claimed on his first day that the CFPB is ‘trampling on capitalism’ by ‘strangling access’ to loans. Yet Republicans’ description of the CFPB as a renegade regulator handcuffing banks doesn’t match up with reality. The CFPB has enacted rules to safeguard consumers from financial predators, but there’s little evidence those rules are crippling the economy. In fact, America’s banks are hauling in record profits, and households have more debt than ever before. Bank loans to businesses are also at all-time highs. Not to mention that the U.S. economy has grown at a healthy 3% pace the past six months, and the stock market has never been higher.”

CFPB employees bitter about Cordray’s pick. American Banker’s Kate Berry and Ian McKendry: “Employees at the Consumer Financial Protection Bureau are privately questioning why outgoing director Richard Cordray abruptly tapped a 34-year-old chief of staff with no enforcement, supervisory or legal experience to head the embattled agency after he resigned. Many were caught off guard when Cordray handed the reins to Leandra English by naming her deputy director as he stepped down on Friday… In interviews, several current and former CFPB officials, most of whom did not want to speak on the record, were upset by Cordray’s eleventh-hour move during a holiday weekend, typically a time when the only news that is released is the kind people want to bury. They were also angry at his choice, arguing that English was not experienced enough for the job.”

Regulators on Tuesday signaled some desire to raise the curtain on the $14 trillion market for U.S. Treasury debt, suggesting investors and the public could soon take a look at a vast and potentially valuable pool of Wall Street trading data.

Reuters

OPINIONS

POCKET CHANGE

TRUMP TRACKER

RUSSIA WATCH:

Flynn pushed nuke plant deal inside the WH. The Post’s Greg Jaffe, Carol D. Leonnig, Michael Kranish and Tom Hamburger: “The week after President Trump’s inauguration, national security adviser Michael Flynn forwarded a memo written by a former business associate and told his staff to fashion it into a policy for President Trump’s approval, according to two people familiar with the exchange. The proposal — to develop a “Marshall Plan” of investment in the Middle East — was being pushed by a company that Flynn said he had advised during the 2016 campaign and transition. The firm was seeking to build nuclear power plants in the region.

His advocacy for the project in the White House surprised some administration officials and raised concerns that Flynn had a conflict of interest. From August to December 2016, he said he served as an adviser to the company, IP3, reporting later on his disclosure forms that he ended his association with the firm just weeks before joining the administration. To push the idea ‘in the first week of the administration without any policy process made no sense,’ said a person familiar with episode who, like others with knowledge of the incident, spoke on the condition of anonymity to describe internal discussions. ‘It was a business proposal in the form of a policy paper.’

Kushner back to the Hill? CNN’s Manu Raju: “Senate Intelligence Chairman Richard Burr said his panel won’t share with another key committee a transcript of an interview his investigators conducted with Jared Kushner, a move that could force President Donald Trump’s son-in-law to return to Capitol Hill for further questioning. Burr told CNN that the transcript of the July interview won’t leave his committee, despite a request from a second panel, the Senate Judiciary Committee, to review Kushner’s responses behind closed doors to Senate Intelligence as part of its Russia investigation. ‘We don’t hand out transcripts,’ Burr said in the Capitol. ‘No.’ Moreover, the Senate Intelligence Committee is also signaling it wants to bring Kushner back for further questioning as well.”

Trump expects probe to wrap up imminently. The Post’s Josh Dawsey, Ashley Parker and Philip Rucker: “President Trump has expressed certainty that the special-counsel probe into his campaign’s possible collusion with Russia will be finished by the end of the year, complete with an exoneration from Robert S. Mueller III, according to several friends who have spoken with him in recent days… Trump has taken special comfort in the reassurances of White House lawyer Ty Cobb, who has offered Trump an optimistic view of the Russia probe, saying that he expects Mueller’s investigation to wrap up by the end of the year and that the White House has little to fear, said two White House officials with knowledge of the conversations…

Some Trump aides and confidants worry about the president’s optimistic assessment of the situation, which he has repeated in conversations in recent weeks, waxing enthusiastically about how he’s eager to be out from under the Russia cloud by 2018. One outside adviser to Trump warned that the president would ‘blow a gasket’ if there was no statement of exoneration by year’s end.”

CHART TOPPER

From The Post’s Philip Bump: “By 2040, two-thirds of Americans will be represented by 30 percent of the Senate:”

DAYBOOK

​​​​​​Today

  • Federal Reserve Chairwoman Janet Yellen testifies before the Joint Economic Committee.
  • The Center for American Progress holds an event on “What a bad tax deal means for communities of color.”
  • The House Financial Services Subcommittee on Housing and Insurance holds a hearing on the role of Ginnie Mae in the housing finance system.
  • The House Financial Services Subcommittees on Financial Institutions and Consumer Credit Terrorism and Illicit Finance will hold a joint hearing on “Legislative Proposals to Counter Terrorism and Illicit Finance.”

Coming Up

  • The House Financial Services Subcommittee on Capital Markets, Securities and Investment holds a hearing on “Implementation and Cybersecurity Protocols of the Consolidated Audit Trail” on Thursday.
  • The House Financial Services Subcommittee on Monetary Policy and Trade holds a hearing on the effectiveness of U.S. Sanctions Programs on Thursday.
  • The House Appropriations Subcommittee on Transportation, Housing and Urban Development and Related Agencies holds a hearing on HUD and community block grants for disaster recovery on Friday.

THE FUNNIES

From The Post’s Tom Toles: “The Republican tax plan has become the Ship of Fooling Themselves:”

BULL SESSION

The Senate tax drama intensifies:

Watch protesters shout as the Senate Budget Committee votes on the GOP tax bill:

Protesters shout down senators after GOP tax bill committee vote:

Trevor Noah on President Trump calling Sen. Elizabeth Warren (D-Mass.) “Pocahontas:”

Watch Full Frontal with Samantha Bee’s own undercover sting operation:


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