Double Trouble: Rate for Student Loans on a Tight Calendar

Famous last words?  “We’re confident that if Congressional Republicans are serious about sparing more than 7 million students the equivalent of a $1,000 tax hike, Members of both parties can come together and get this done before rates double in two weeks,” White House spokesman Matt Lehrich said.”  [Roll Call] First, some of those 7 million individuals staring down the barrel of a doubled student loan interest rate are right here in Nevada.  Secondly,  the two parties aren’t all that far apart.

There’s the GOP version of how to pay for the program: “The Republicans offered an increase in current employee contributions to the Civil Service Retirement System over the next three years to offset the cost.”  And, there’s the Democratic version: “ Reid proposed a payfor that already was agreed to by Republicans in a Senate transportation bill. Reid suggested creating fewer tax deductions for pension contributions and increasing premiums that employers pay in to the Pension Benefit Guaranty Corp.”  [Roll Call]

There are TWO weeks before the deadline.  There are only six more work days on the House of Representatives calendar. [House]  The Senate recesses for “state work” sessions on May 28th. [Senate] Movement with a bit more alacrity might be in order.

Reid Suggests Compromise on Student Loan Rates

From the e-mail inbox, Senator Harry Reid (D-NV): “Washington, D.C. – In a letter to Speaker John Boehner and Minority Leader Mitch McConnell, Senate Majority Leader Harry Reid today offered two bipartisan proposals to pay for a one-year extension of student loan rates to prevent them from doubling on July 1st. The first proposal expands an offset that recently passed the Senate on a strong bipartisan vote of 74-22 as part of the transportation jobs bill. The combination offers a bipartisan path forward to break the impasse currently facing the student loan bill.”

OK, but I’m still not happy.  First, there is really no excuse for putting student loan interest rates up for revision on an annual basis.   Last time I looked it still took four years to get a college degree, and longer if the individual was interested in advanced degrees.  Advanced degrees being the kind that get a person into the 3.6% and below unemployment categories. [DoL]

Secondly, not so long ago it was declared unnecessary to put the cost of military operations in Iraq and Afghanistan  on the books, and thus the Bush Administration ran those activities via emergency supplemental appropriations without any mention of “pay fors.”  Neither was it deemed necessary to subject  the Medicare Part D program to “pay fors,” with some demonstrably budget busting results as of January 1, 2006.   However, when we’re speaking of educating our future work force — now, suddenly it’s absolutely essential we “pay for” every federal expenditure.

Granted, it is more fiscally responsible to know from whence the money is coming to pay for federal expenditures.  However, would it crush the Job Cremators so much to have a loophole for ultra-wealthy hedge fund and lobby shop operators closed? — as was suggested, and as caused Senator Dean Heller (R-NV) to issue his usual  cri de coeur for “small business.”

And thus we continue to tinker, Senator Reid offering the following:

(1)    Reforms to employer pension payment contributions. The proposal outlined by Senator Reid would create a “stabilization range” for employers to compute their pension liabilities. Instead of being forced to use the two-year corporate bond rates in computing their pension liabilities, the new proposal would allow them to compute liabilities using rates for a 25-year period within which the two-year rates must fall.  To the extent that the two-year rates fall outside this range, the company would be allowed to use a rate closest to the two-year rate that falls within the stabilization range to compute its pension funding requirements.  This more flexible approach would narrow fluctuations in computing pension contributions and result in businesses taking fewer tax deductions for contributions.

(2)  Change contributions to Pension Benefit Guarantee Corporation premiums. In addition, Senator Reid proposed increasing premiums paid by employers for the insurance provided by the Pension Benefit Guaranty Corporation.  Currently, employers pay a flat dollar premium of $35 per pension plan participant as well as a variable premium equal to $9 for each $1,000 that the plan is underfunded.  To help improve the PBGC’s finances, these premiums could be increased as part of this proposal.

“The combination of these two proposals will provide sufficient resources to fund both a one-year extension of the current student loan interest rate and re-authorization of the nation’s surface transportation programs.”

OK, if we adopt these proposals then we get a continuance of the 3.4% student loan rate AND the re-authorization of the surface transportation programs.  And, I can hear it now — OMG, a more flexible approach to calculating pension fund contributions will be “a plague upon Capitalism?”  Or, increasing the premiums for the PBGC will be a “onerous burden on job creators?”   The former argument is offset by the fact that BUSINESS groups are the ones asking for the recalculation of the pension funding formula. [WallStJournal]

There are reasons to be concerned about the recalculation of pension fund contributions, none of which have anything to do with plaguing Capitalism.  One major cause for careful consideration is that changing the formula could have detrimental effects on defined benefit plans.  [WallStJournal]

The Pension Benefit Guarantee Corporation is already facing some serious issues, some of which were outlined in a 2010 report from the GAO:

“Plans in the worst condition may find that the options of increasing employer contributions or reducing benefits are insufficient to address their underfunding and demographic challenges. For these plans, the effects of the economic downturn, declines in collective bargaining, the withdrawal of contributing employers, and an aging workforce will likely increase their risk of insolvency. Without additional options to address plan underfunding or to attract new employers to contribute to plans, plans may be more likely to require financial assistance from PBGC.  Additional claims would further strain PBGC’s insurance program that, already in deficit, it can ill afford.”

Economic growth, as we’ve seen in the private sector over the past 27 months, will help these issues, but asking employers to pay increased premiums to backstop an already serious issue isn’t too much to ask.  If the corporations make additional contributions, then the PBGC isn’t further behind the eight-ball when companies fail.

On the optimistic side, both suggestions from Senator Reid have received bi-partisan support in the past.  On the pessimistic side, chucking their previously held positions over the side has become a Republican art form — witness the individual mandate for health care insurance coverage, and “cap and trade” schemes for pollution elimination.

Since it’s been “campaign season” since January 20, 2009 I am a bit leery of Republican cooperation in the U.S. Senate.  Meanwhile, the clock is ticking as students and their parents try to get body and soul together concerning educational expenses for the next school term.

Student Loan Rates Will Double So GOP Can Protect Top 0.5%?

The deadline’s looming and this is what we get from Senator Dean Heller (R-NV):  “Instead of compromising, the Democrats want to raise taxes on small business at a time when we need jobs,” Nevada Sen. Dean Heller said of the Democrats’ plan last month, calling their insistence on their bill “further proof that Washington is broken.”  [LVSun](emphasis added) Note the “small business” insertion.  It’s required in all GOP utterances about taxation.

What’s on the table?  “Take the student loans debate. In the past month, Senate Democrats lost a vote on their bill to offset the $6 billion cost of keeping student loan interest rates at 3.4 percent by closing a tax loophole on hedge funds. Senate Republicans lost a vote on their bill to offset it by stripping money from a health care prevention fund.” [LVSun] (emphasis added)

Now, go back and substitute “hedge funds” for “small business” and you will have the drift of the Republican argument.  It is better to allow student loans rates to double to 6.8% than it is to close a tax loophole on hedge funds.

This raises some questions about the core message of the Republicans, Senator Heller included.

#1.  What is a Small Business?  “… what Congressional Republicans Define as “Small Businesses” are Predominately Millionaires and Billionaires, Corporate Law Partners, Hedge Fund Managers. Congressional Republicans define as small businesses any individual who receives “small business income”.” [Wh]  OK, so what is “Small Business Income?

Back in August 2011 the OTA attempted to define what constitutes a small business for tax purposes (pdf).   The OTA suggests that previous definitions are overly generous:

“Although “small business owners” are often the subject of tax policy debate, a consensus does not exist regarding the specific attributes that distinguish small businesses from other firms. Previously, the Office of Tax Analysis had counted a small business owner as any individual who receives flow-through income from a sole proprietorship, partnership, S corporation, farming operation or miscellaneous rental activity. This overly broad definition was used because, for the majority of flow-through business income (partnerships and S corporations), it was not possible to trace income from the business entity to the respective owner(s). Due to newly accessible tax data, this technical constraint has been overcome.” [OTA pdf]  (emphasis added)

Notice that the old definition classified a small business person as ANYONE receiving flow through income from just about anywhere.  Major money makers took full advantage of this rather loose categorization.

Over half of the 400 Highest Earners in the United States Would Be “Small Businesses”: According to IRS data, in 2009, among the 400 taxpayers with the highest adjusted gross income – group that averages over $200 million each in taxable income – at least 237 would have qualified as “small businesses” under this definition. [Wh]

How nice for them, because these “small business persons” are NOT necessarily the butcher, the baker, the candlestick maker, the auto parts dealer, the retail grocery owner, the furniture store owner, the beauty shop proprietor, the catering service, the garage owner, or the corner bodega shop keeper.

If we count absolutely ANYONE who gets income from S corporations, proprietorships, and partnerships, then each and every member of a law firm’s partnership is categorized as a small business person, including the lobby shops in Washington, D.C.  Each and every partner in a hedge fund is categorized as a small business person. Each and every individual getting passive investment income is a small business person.

The definition of a small business is problematic, but even suggestions that accounting treatments be changed brings howls of “tax increases” to “job creators” from the Republican side of the aisle.  During the last big debate on student loan rate reductions:

“…the Republicans would not accept the Senate Democrats’ proposal to pay for a one-year extension by changing a law that allows some wealthy taxpayers to avoid paying Social Security and Medicare taxes by classifying their pay as dividends, not cash income.”  [NYT]

This is nice work if you can get it.  You are a “small business” if ANY of your income passes through from passive investments, hedge funds, law firms, and lobby shops.  AND for the wealthiest among us you get to avoid paying payroll taxes by classifying earnings as dividends and not cash income.

#2.  Exactly what “small businesses” would have be affected by S. 2343? Here’s the loophole the Democratic leadership was trying to close:

Amends the Internal Revenue Code and title II (Old Age, Survivors and Disability Insurance) of the Social Security Act to require certain shareholders of a subchapter S corporation engaged as a partner in a professional service business to include income or loss attributable to such business in their net earnings from self-employment for employment tax purposes.

Restricts such tax treatment to shareholders whose modified adjusted gross income exceeds a specified amount that varies based on their tax filing status.

Defines a “professional service business” as any trade or business providing services in the fields of health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services.  [Thomas]

The loophole would be closed for anyone earning over at least $250,000 AGI from a proprietorship, S corporation, or partnership.  [Thomas]

To get an idea of just how few people would be discomfited by this change in accounting treatment, note that the average annual earnings for a  medical practice is about $158,000.  Average mean annual earnings range from about $154,000 to $199,860.  [BLS]

The Bureau of Labor Statistics reports that the average earnings for members of the legal profession range from $75,350 annually for lawyers working with insurance carriers  to $199,850 for lawyers in the energy sector.  Architects and engineers may expect to see a range of annual earnings from about $73,000 annually up to approximately $105,000. [BLS] Salaries for accountants range from $40,000 to about $110,000 annually. [BLS] For all the brouhaha about over-paid athletes, most professionals can expect to earn about $79,830 annually. [BLS]  The annual mean earnings for farm and ranch operations comes in at approximately $70,000 [BLS]

So, what small businesses are  Senator Heller and his Republican cohorts so diligently protecting?    The average sports agent is taking in about $92,500.  The average personal financial adviser earns $90,900.  The average chief executive officer earns about $176,550.  [BLS] The majority of those people engaged in the specific occupational fields set forth in the terms of S. 2343 would not be affected at all by the changing accounting treatment.

When it all boils out, what’s left is the notion that the top 0.5% must be assuaged, even if the sons and daughters of most health care professionals, most lawyers, most architects, engineers, and accountants, most sports agents, and most management consultants pay double the current rate on their Stafford Student loans.

Thus, to the farmer, the rancher, the architect, the lawyer, the physician, the accountant, the agent, the engineer, the broker, the financial adviser, and the management consultant…. and to the artist, baker, clothing shop owner, computer specialist, landscape company proprietor, right on to the veterinarian and the zoologist…. Senator Heller’s message is clear.

It is more important that the ultra-rich be protected than it is for your son or daughter to find an affordable student loan.

Oh, wait, the Republican did offer another solution — just drop the preventative health care funding from the Affordable Care Act.   Stripping funding for cancer screenings, anti-obesity programs, and health care awareness for youngsters didn’t seem very popular, so now the GOP has come back with “tweaks” to the FY 13 budget for offsets.   These would include requiring federal employees to contribute 1.2% more to their own retirement funds, a revision of Medicaid taxes, auditing Social Security overpayments, and changing the timeline for the accrual of student loan interest.    The Republican wrote to the President, Senator Tom Harkin (D-IA) responded: “…if Republicans were really serious about negotiating a plan to pay for the bill, they would be meeting with Democrats on the Hill, not writing letters to the president.”  [USN]  Harkin also added that there was no way the Tweaks added up to a real solution.

And, what’s really interesting —  is that in the past there was Republican support for closing the very loophole the Democrats are now suggesting. [USN]  How do we spell O b s t r u c t i o n i s m?

“You may never know what results come of your action, but if you do nothing there will be no result.”  Gandhi.

Heller Votes To Sustain GOP Filibuster Of Student Loan Rate Reduction Bill

S. 2343  to maintain the 3.4% Stafford student loan rate is being filibustered by the Senate Republicans, and a cloture motion failed today on a 52-45 vote.  [roll call 89]  Senator Dean Heller (R-NV) voted to sustain the filibuster and prevent the bill from coming to a vote in the Senate.

The bill provided a ‘payfor’ by closing a loophole which some privately held corporations use to avoid taxation.  It is this provision that may have caused Senator Heller to once more bemoan things that “hurt small business.”  Senator Heller and his Republican cohorts have a very generous definition of what constitutes a “small” business.   What “tax increases” were in the offing and who might be required to pay?

Section 3 of S.2343 includes the following about who would have to pay a little more in self employment taxes in order to extend the lower interest rates for student loans, by increasing requirement of Section 1402 of the tax code.  Who would see any increase in tax liability?

           ” (D) APPLICABLE SHAREHOLDER- For purposes of this paragraph, the term `applicable shareholder’ means any shareholder whose modified adjusted gross income for the taxable year exceeds–

`(i) in the case of a shareholder making a joint return under section 6013 or a surviving spouse (as defined in section 2(a)), $250,000,

`(ii) in the case of a married shareholder (as defined in section 7703) filing a separate return, half of the dollar amount determined under clause (i), and

`(iii) in any other case, $200,000.” (emphasis added)

In other words,  shareholders in privately held corporations who have modified adjusted gross incomes (income after deductions) of $200,000 and $250,000.   Other provisions to harmonize other IRS provisions use the same numbers.

This isn’t a new idea.  The notion of increasing the payroll tax liabilities of privately held professional business service corporations was part of the American Jobs Act filibustered in the summer of 2010.   And, don’t let the overarching categorization of S-Corporations fool you.   There are many kinds of S-Corporations and many are really small business operations, but there are only TWO which fit the definition in S. 2343.

#1. The independent consultant or contractor who under normal circumstances would be paying 15.3% in self-employment taxes on the first $106,800 earned, but who by using the S Corp Loophole pays taxes on only that part of the firm revenue classified as ‘wages.’   It doesn’t take an advanced degree in accounting to figure out that if I only declared some $40,000 as “wages,” I could save myself thousands of dollars in terms of the self-employment tax.

#2.  The Partnership Loophole.  An engineering, financial management, law firm, lobby shop, or other “professional business service” company can dodge around the liabilities associated with partnerships by creating an S corporation.   This isn’t rocket science either — the partner owns an S corporation, and the S corporation owns a slice of the partnership equity.

Note please, that we are NOT talking about plumbers, drywall contractors, construction firms, small retailers, dry cleaning firms, electrical contractors, waste management companies, automobile repair shops, child care services, snow removal services, beauty shops and barbers, excavators, dog groomers, painters, service stations.  We are not speaking of carpet cleaners, florists, local realtors, motel owners, fast food shops, agricultural irrigation supply companies, septic tank cleaning services, farmers, ranchers, or hot tub dealers.  The provisions apply solely to “professional business service” S corporations, i.e. management, lobby shop, hedge funds, and big law firms.

What the Republicans appear to be staunchly defending is the loophole by which lobby shops, management firms, hedge funds, large accounting operations, and big law firms pay less in self-employment taxes while….

….the sons and daughters of drywall contractors, small retailers, dog groomers, electrical contractors, child care providers, service station owners, carpet cleaners, florists, local realtors, local motel owners, irrigation equipment suppliers, septic tank cleaners, farmers, ranchers,  hot tub dealers, and furniture store owners are looking at paying 6.8% interest on their student loans.

The Republicans give every appearance of believing that Some Small Businesses are More Equal Than Others.

As You Head Out From These Hallowed Halls, We Republicans Have A Message For You

June approaches and House Republicans, perhaps like Representative Joe Heck (R-NV3) or Representative Mark Amodei (R-NV2), will be out on the graduation speaker circuit?  Whatever will they talk about?  Maybe they’d like to tell us they “voted in favor of reducing the costs of student loans for college?”  Cue the Boo Birds.

Back on March 29, 2012 both Republican Representatives from the state of Nevada voted in favor of the Romney/Ryan Budget H.Con.Res. 112 which included a permanent increase in the rate of student loans to 6.8% interest. [roll call 151]

Then on April 19, 2012 both Republican Representatives from the state of Nevada voted in favor of H.R. 9, the so-called “small business tax cut” act.  [roll call 173] There were NO offsets, NO “payfors” in this $46 billion tax windfall for the 1%.   What were those loopholes for the rich if not famous?

50% of the benefits of this bill go to millionaires, and NOT to the average small business owner.  A “small business” was defined as a company employing fewer than 500 employees — including Paris Hilton Entertainment, Inc., the Los Angeles Dodgers, and Donald Trump Tower Sales and Leasing Inc.  Some beneficiaries of Congressional Compassion would include highly profitable  Washington, D. C. lobby shops that employ fewer than 500.  Major law firms with 500 or less on the payroll …  Hmmm, not exactly your local neighborhood Able Heating Contractors, or Baker’s Dozen Deli, or even Charlie’s Sports Bar and Grill.

There is no provision in the bill to induce companies to hire domestically. “Under the Cantor bill there is no requirement that a business owner use the extra cash from the tax cut to reinvest in his or her business, as opposed to spending it on personal consumption or simply putting it in the bank. Businesses that do not create jobs—and even those that lay off employees—are still eligible for the deduction,…”  [CAP] (emphasis added)

Worse still, H.R. 9 was a “windfall” and not an incentive for domestic investment or hiring.  Again, the CAP explains:

“For most business owners H.R. 9 would be a pure windfall with no effect on investment or job creation. Business owners make investments and hire people not because they have extra cash lying around but because those investments and hires will increase revenues by more than their cost. And because labor costs are deductible, a reduction in tax rates on business profits, which is essentially what H.R. 9 offers, does not change marginal incentives for hiring.”

And, how do we pay for these tax windfalls?  We don’t. The entire tax cut/windfall is “paid for” with BORROWED MONEY.  Well, thus much for the Deficit Hawks in the audience.

Now, on April 27, 2012 the House Republicans, Representatives Amodei and Heck included, voted in favor of H.R. 4648 to reduce the interest rates for Stafford Student Loans.   [roll call 195] But wait! There’s a catch.  This has to be “paid for” — we supposedly can’t afford to “borrow” money to pay for this — “think of our grandchildren….”

How did the House GOP membership propose to pay for the bill? By raiding the preventative health care funding from the Affordable Care Act.  And, what were those funds supposed to be used for?

The preventative health care funds included money for federal, state, and local agencies to address smoking cessation programs, childhood obesity issues, nutrition education, and funding for federal, state, and local health care infrastructure improvements in information technology, workforce training, and improvements to state and local health departments so as to improve public detection and responses to epidemics. [HHS]

What does this have to do with Nevada? “Nevada is receiving $5,916,502 from the Prevention Fund this year to reduce disease rates in the state and help ensure today’s children are not the first generation in U.S. history to live shorter, less healthy lives than their parent.” [TFAH]

The message is reasonably clear — if we are speaking of giving more than half of $46 billion to “small businesses,” in H.R. 9 it’s perfectly OK to borrow the money to pay for that approximately $23 billion bill for the 1%’ers.  However, if we are speaking of reducing the costs of Stafford Student Loans then, by the lights of Representatives Amodei and Heck, we have to raid the fund that would have allowed Nevada to pay for the use of non-lighted athletic fields by youth groups promoting sports and healthy lifestyles, or allowed Nevada to help support school district efforts to reduce trans-fats in school lunch menus, or to supporting the hiring and training of epidemiologists, health information specialists, and lab scientists for our public health system.  (Remember that Hepatitis C thing in Clark County?)

Perhaps our commencement speaker would like to say, “The message is clear, the vision is certain, there are choices we must make in life, and if you are RICH we will reward you, even if we have to borrow the money to do it; but, if you are not then you must choose between better health care services in your state and community, or getting a reduction in your student loan interest rate.”

Some choice, some message…