An April 24, 2018 Senate Finance Committee hearing on "Early Impressions of the New Tax Law" focused primarily on who is benefiting from the Tax Cuts and Jobs Act (TCJA) and at what cost to the federal budget deficit, with little discussion of implementation of the law or a follow-on tax bill.

Chairman Orrin Hatch (R-UT) and Ranking Member Ron Wyden (D-OR) delivered lengthy opening statements offering differing views on why there was no bipartisan cooperation in the development of the TCJA, and whether the bill has been successful and for whom. Chairman Hatch said there are things that could have been done to make the bill better if Democrats had participated, and that technical corrections should be enacted to enhance what the law already does well.

Senator Wyden said Republicans made promises about wage increases that haven't come to pass and should be kept before rushing ahead to a second tax bill. He also highlighted new Joint Committee on Taxation (JCT) data about distribution of the benefits of the new pass-through deduction, a frequent point of discussion among Democratic members of the Committee, along with recent Congressional Budget Office (CBO) deficit projections in the wake of the tax law.

Tables re-released by the JCT on April 24 (to correct errors in the previous version) showed that those with annual incomes over $1 million will receive 44% of the tax benefit from the deduction for qualified business income under Section 199A in 2018, and 52% of the benefit in 2024. The tables (JCX-32R-18, attached) are intended to supplement JCT's Overview of the Federal Tax System as in Effect for 2018 (JCX-3-18), released in February, to present estimates that incorporate the CBO's 2018 baseline projections.

Witnesses at the hearing were:

— David K. Cranston, Jr, President, Cranston Material Handling Equip. Corporation, McKees Rocks, PA

— Douglas Holtz-Eakin, President, American Action Forum, Washington, DC

— David Kamin, Professor of Law, New York University School of Law, New York, NY

— Rebecca Kysar, Professor of Law, Brooklyn Law School, New York, NY

Cranston said the tax law has given him optimism about the economy as a small-business owner, and Holtz-Eakin lauded the new law for increasing household, small business, and CEO confidence.

Kamin criticized the TCJA for adding significantly to the deficit over 10 years and providing the largest benefits to those with high incomes, and said "true tax reform" should remain on the agenda to undo the damage of the new law. Kysar outlined what she believes are four problems with the bill from an international perspective: (1) new international rules aimed at intangible income incentivize offshoring; (2) the new patent box regime (through the FDII) will not increase innovation, causes WTO problems, and can be easily gamed; (3) the new inbound regime (through the BEAT) has too-generous thresholds; and (4) the TCJA falls short of true international tax reform.

Pass-through deduction

In response to a question from Senator Wyden about the benefits of the pass-through deduction being tilted toward those with annual incomes over $1 million, Kamin said there was a "lack of wisdom" in enacting a deduction that is regressive and draws lines between those who are eligible and those who are not that tax professionals are reportedly trying to game.

Senator Claire McCaskill (D-MO) suggested that eligibility for the Section 199A deduction appears arbitrary and that businesses currently have no idea what the rules are going to be on pass-throughs. She was critical of the complexity of the deduction enacted in a tax bill "that was supposed to simplify everything." Kamin and Kysar agreed the deduction is among the worst provisions to be added to the tax code.

Senator Rob Portman (R-OH) said it is concerning that conversations about the tax law continue to be a partisan exercise because everyone agreed the tax code needed to be reformed, especially in terms of international taxes. The only Republican senator in the room at the time, Portman said he felt as if he were looking at "an entirely different tax bill" than was being discussed, and that the TCJA has resulted in great optimism among small businesses. He said the notion that a small business owner making $1 million per year is wealthy is not always true because the $1 million may be a reflection of what the business makes, not the salary the owner is drawing.

Deficit concerns

Senator Michael Bennet (D-CO) detailed the history of federal budget deficits over the past 20 years or more, and highlighted that the projected deficit next year will be nearly $1 trillion. "It's all debt that is put on the shoulders of the next generation," he said of the cost of the TCJA. Senator Robert Menendez (D-NJ) also raised deficit concerns.

Holtz-Eakin acknowledged the nation is in a "significant hole" with regard to the deficit, but that the deficits on the books before the TCJA were driven by spending, not tax, and spending cuts need to be part of the conversation about reducing the deficit. Senator Sherrod Brown (D-OH) later seized on those comments in arguing that Republicans intended all along to ultimately pay for the tax bill with entitlement cuts, and asked how Republicans can justify cutting taxes for the wealthy and corporations and later paying for those cuts by raising the eligibility age for Medicare and Social Security.

Other concerns

Both Senators McCaskill and Menendez expressed concern that drug prices have not come down in the wake of the corporate tax cut, which benefits drug manufacturers.

Senator Bill Nelson (D-FL) said the CEOs with whom he spoke would have been happy to have reduced the statutory corporate income tax rate from 35% to 25% or even 28%, which would have lessened the deficit effects of the TCJA and freed up some revenue for other priorities.

Holtz-Eakin agreed with Senator Chuck Grassley's (R-IA) suggestion that the TCJA makes inversions less likely by reducing the statutory corporate income tax rate and converting to a territorial system.

Opening statements from Chairman Hatch and Senator Wyden are attached, along with witness testimony.

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ATTACHMENTS

Hatch Opening Statement

Cranston Statement

Hotz-Eakin Statement

JCX-32R-18

Kamin Statement

Kysar Statement

Wyden Statement