Until the Ink Dries

In Ernest Hemingway’s The Sun Also Rises, a character describes how he went bankrupt:

“Gradually, then suddenly.” That process might also describe the potential for fast-developing political risks facing the brokerage community as Congress debates (and likely passes) President Donald Trump’s One, Big, Beautiful Bill (OBBB).

The version of the budget reconciliation bill the House passed in May captures many of The Council’s priorities, both in what it does and does not do. Throughout the year, we have made the case (along with the business community at large) that the 2017 Tax Cuts and Jobs Act should be extended, particularly with respect to the two-thirds of Council member firms that are organized as pass-throughs. The law established a temporary 20% deduction for qualified business income for certain sole proprietorships, partnerships, S corporations, and other pass-through entities that expires at the end of this year. The reconciliation bill passed by the House would increase the deduction to 23% and make it permanent.

Likewise, the TCJA included the largest corporate tax cut in U.S. history, dropping the marginal rate on corporate income from 35% to 21%. This, too, will continue under the House construct.

In 2017, The Council (and the employer community) had to whack an effort by then-House Speaker Paul Ryan and others to limit the deductibility for employer-sponsored group health insurance. True to the word of House GOP leaders this year, the OBBB doesn’t touch the employer tax exception.

But the bill’s not done until it’s done. At press time, the Senate was still working on the OBBB, with the Senate parliamentarian ruling that a number of measures cannot be included in reconciliation legislation. So it is all but certain to include significant differences from the House bill. The Council and its partners will continue to fight for those key tax measures until the final legislation is signed into law.

There’s an old saying in the Washington lobbying community: scare ’em and save ’em. An endless number of hired lobbyists are ready to create an ugly political scenario in convincing a client to take them on, only to then “save them” from ruin. This was best exemplified to me in the 2005 inquisition into broker compensation by then-New York state Attorney General Eliot Spitzer. That was a serious crisis, but it never seriously threatened to spill over into congressional action. That didn’t stop many contract lobbyists from coming out of the woodwork to calm the (legitimately) jittery nerves of brokerage executives, and profit from it.

So, it’s proper to ask, are we scaring benefits brokers on the employer tax exclusion, only to save them? I think not. The exception is the No. 1 tax expenditure in the tax code. You can fund a lot of tax breaks if you eliminate or scale it back.

In this labor market, employers must offer good benefits to attract and retain workers, but many businesses are at the breaking point, given ever-escalating health insurance costs. Many Republicans believe in a purist, “consumer-driven” health insurance marketplace that decouples employers from group insurance—letting everybody fend for themselves.

We have toiled for many years to make Congress sensitive to the necessity of an employer-sponsored group health insurance marketplace. We’re still doing it, every day, on Capitol Hill. But ginormous tax bills only come around every so often. And before this one is completed—especially given the razor-slim partisan margins in Congress—a great many things are going to be stuffed into the bill at the last minute, in the dead of night.

A buddy of mine is one of the smartest tax lawyer/lobbyists to have ever walked the halls of Congress. During the massive 1993 battle over the Clinton administration tax bill, he was hired by a Canadian firm with U.S. business that was getting stuck by an obscure tax provision that amounted to unfair double taxation. The client had a sympathetic cause, but there was little constituency to solve a foreign company’s problem. The solution would necessitate a $60 million offset somewhere else.

But my friend knew that the entire cellular telephone system depended on the federally controlled spectrum, worth hundreds of billions of dollars. He also banked that the industry association representing the cell companies might be caught sleeping at the switch. Voilà: Now, on page 200-or-something-other in the bill was a one-sentence $60 million break for the Canadian company. A couple hundred pages later came a tiny tweak in the federal cellular telephone spectrum that raised, you guessed it, $60 million. This may not meet one’s democratic ideals for tax legislation, but it was damned good lobbying. And the whole thing happened gradually, then suddenly.

At this writing (June 30), there is no way to reconcile competing priorities between the House and the Senate, given the philosophical disparities within the GOP conferences of each chamber on the State and Local Tax (SALT) exemptions, the debt limit, deficit reductions, and cutting Medicaid.

But, with zero Democratic support and three-vote margins in each chamber, the GOP must unite. The alternative is a $4 trillion tax hike at the end of this year when the TCJA expires, decimating tax provisions that are crucial to the brokerage community. The alternative is defaulting on America’s debt. The alternative is political Armageddon for congressional Republicans. The bill may die a half dozen more deaths, but gradually, it will get there. But first, suddenly, a lot of compromises are going to be made when few people are paying attention. Our job is not to be asleep at the switch when that happens.