Why a Firm Believer in Tax Cuts Could Derail the Senate Tax Cut Plan

WASHINGTON — On the eve of the House’s vote to pass a far-reaching $1.5 trillion tax cut, Speaker Paul D. Ryan of Wisconsin placed a hasty phone call to his state’s senior senator, Ron Johnson, in hopes of resolving an unlikely conflict in his own back yard.

Mr. Johnson had become the first Senate Republican to say publicly that he could not vote for the Senate’s version of the tax bill. During the phone call on Wednesday afternoon, Mr. Ryan, who had campaigned heavily for Mr. Johnson in 2016, posed an essential question, according to the senator: “What are you going to need?”

What Mr. Johnson needs, he said in an interview from Wisconsin on Friday, is for the bill to treat more favorably small businesses and other so-called pass-through entities — businesses whose profits are distributed to their owners and taxed at rates for individuals. Such entities, including Mr. Johnson’s family-run plastics manufacturing business, account for more than half of the nation’s business income, and the senator says the tax bill would give an unfair advantage to larger corporations.

“I just have in my heart a real affinity for these owner-operated pass-throughs,” he said. “We need to make American businesses competitive — they’re not right now. But in making businesses competitive, we can’t leave behind the pass-throughs.”

The sudden fissure between longtime allies laid bare the challenge that Republicans face as the tax bill leaves Mr. Ryan’s care and navigates the rough waters of the Senate, where different priorities within the party could sink the bill if not adequately addressed.

Senate Republican leaders, who are seeking a major legislative victory before year’s end, hope to bring their tax bill, which differs significantly from the House measure, to a vote after Thanksgiving. But it is unclear whether it has enough support to pass in the narrowly divided chamber.

Offering concessions to skeptical senators one by one could prove an impossible task for Republican leaders, who face restraints under Senate rules on the total size of the tax cut package. Those leaders are hoping, instead, that they can pull off a version of Mr. Ryan’s strategy: all but daring holdouts to derail the party’s top priority.

Republicans, who control Congress and the White House, are desperately seeking their first significant legislative achievement of the Trump presidency. Mr. Johnson’s public wavering elicited calls from President Trump and a visit from Treasury Secretary Steven Mnuchin and Gary D. Cohn, chairman of the National Economic Council, all of whom sounded out Mr. Johnson about his concerns.

Mr. Johnson is a firm believer in the power of tax cuts to lift economic growth. He grew up on a Minnesota farm, worked as an accountant after college, and spent more than 30 years immersed in his family’s plastics company before assuming his Senate seat in 2010.

Since winning re-election in 2016, he has not shied from voicing displeasure with the Republican leadership. He was an early and vocal critic of the party’s legislation to replace the Affordable Care Act, though he ultimately voted in favor of the bill.

His concerns with the Senate’s tax bill stem not from its overarching goal of cutting taxes but with how the bill treats small businesses and large corporations. Mr. Johnson says the legislation is tilted in favor of big companies, and he is eager to find a way to level the playing field.

Mr. Ryan, who was his party’s 2012 vice-presidential nominee, helped Mr. Johnson’s ascendance to the Senate. Mr. Ryan barnstormed Wisconsin on Mr. Johnson’s behalf as his come-from-behind re-election bid took off last year, and the two have forged a bond in Washington.

“You know what we control, with Ron Johnson’s election?” Mr. Ryan asked the crowd at a rally the night before the election. “We in Wisconsin control who controls the United States Senate. If you want to see anything get done — pass it in the House, get it from the Senate and get it on a Republican president’s desk and get it into law — Ron Johnson’s got to get re-elected.”

But the dynamics of the two chambers differ markedly. With the House tax bill, Mr. Ryan and other Republican leaders employed a command-and-control process and a rocket-speed schedule to minimize Republican dissent. The strategy worked: The bill sailed through the House on Thursday along party lines, two weeks after it was introduced.

In the Senate, where the party’s margins are much smaller and individual members are more powerful, party leaders will need to win over what could be a half-dozen or more wavering Republicans, beginning with Mr. Johnson. Others include Senators Bob Corker, Jeff Flake, Lisa Murkowski, Susan Collins and John McCain.

The Senate bill cleared the Senate Finance Committee on Thursday night. Before he can support it, Mr. Johnson said, he wants to see changes in its treatment of pass-through entities to put them on equal footing with corporations. While rates would fall for Mr. Johnson’s family business under the Senate bill, they would not fall as much as those for larger businesses.

More than 90 percent of American businesses are pass-throughs. The Senate bill would give pass-through owners a 17.4 percent deduction on their income taxes, while cutting the corporate rate to 20 percent from 35 percent. The special deduction means the owner of a high-profit pass-through would pay an effective top rate of about 32 percent, well above what a traditional corporation would pay.

The pass-through treatment has earned the endorsement of the National Federation of Independent Business, the powerful lobbying group for small businesses. “We very much like the Senate bill — it’s a really good deal for the vast majority of pass-through businesses,” said Jack Mozloom, a spokesman for the group. “Based on our analysis, we think it’s going to provide them with a substantial tax cut.”

Mr. Johnson launched the family’s plastics sheeting company in 1979 with his brother-in-law. Over the course of his career, he said, he has seen many family-run companies — his customers — be snapped up by larger corporations, or fold after being unable to compete with them. He said that the tax code unfairly advantaged those corporations, and that the Senate tax bill would widen those advantages, by cutting corporate taxes more substantially than those for pass-through businesses.

Speaker Paul D. Ryan called Mr. Johnson, a fellow Wisconsinite, this past week to see how he could be persuaded to support the tax bill. CreditAl Drago for The New York Times

Mr. Johnson’s preferred approach to that imbalance would be to force all corporations to become pass-throughs, a move he says would equalize tax treatment and encourage more corporate investment. He says this approach would not personally benefit him because it would not cut taxes on pass-throughs; Mr. Johnson earned between $215,000 and just over $2 million in pass-through income in 2016, through several limited liability companies.

But Mr. Johnson concedes that his Republican colleagues do not seem likely to add such a provision to their tax bill. “Unfortunately,” he said, “it’s pretty late in the game.”

And so the question becomes: What changes would he accept?

Republican leaders will probably need to pose that question to several senators in the days to come. Mr. Flake, of Arizona, and Mr. Corker, of Tennessee, have raised concerns over how much the bill would add to the budget deficit, particularly if Republicans do not allow all individual — and pass-through — tax breaks to expire at the end of 2025, as the bill currently calls for.

Ms. Murkowski, of Alaska, said on Friday that if the bill continued to include a repeal of the Affordable Care Act’s individual mandate to buy health insurance, she would prefer that Congress first pass a different bill to help stabilize insurance markets. “However,” she said in a statement, “one should not assume this is a precondition for my support for the tax bill.”

Mr. Johnson suggested in the interview that if the Senate did not force all companies to operate as pass-throughs, it should at least cut their taxes further to equalize their treatment with larger corporations. Such cuts, he acknowledged, would be expensive in terms of lost tax revenues, and Republicans must stay within the $1.5 trillion limit for additional deficits in order to pass the tax bill on a party-line vote.

The senator said he would have preferred if Republicans, in an earlier budget bill, had set that limit higher, at $2 trillion or $3 trillion.

For now, Mr. Johnson said he was gathering information and trying to work with administration officials on identifying the group of pass-through companies that most need additional help.

“I’m optimistic” that solutions will be found, Mr. Johnson said, “because we all understand how important this is. I don’t want to block this. There’s no way I want to block this.”

Senate leaders are counting on that attitude, as they try to replicate Mr. Ryan’s success in the House. They believe that on a core conservative issue, at a time when the party is still searching for a signature legislative victory under Mr. Trump, no senator will want to be the one who blocks the bill.

They also note that even though Mr. Johnson raised similarly loud concerns over the party’s failed health care bill earlier this year, in the end, he voted for it.

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