U.S. Senate Democrats aim to close tax loophole on ‘pass-through’ firms – sources

By Rose Horowitch and Richard Cowan

WASHINGTON (Reuters) -U.S. Senate Democrats are finalizing a plan to close a tax loophole used by many companies, and they want to use those revenues to shore up the government-run Medicare healthcare program for the elderly and disabled, sources familiar with the discussions said on Thursday.

Democrats expect to submit legislative text to the Senate parliamentarian in coming days, said one source, who asked not to be identified in order to discuss the private negotiations.

The tax change is aimed at the majority of businesses in the United States that are known as “pass-through” firms that are not subject to the corporate income tax and instead have their income reported to the government on individual tax returns, subjecting them to the lower tax rates.

Under the proposed changes, individuals who make more than $400,000 annually and couples who make more than $500,000 would have to pay a 3.8% tax on earnings from their pass-through business income.

The measure is intended to move through the Senate under special budgetary rules that require approval by the parliamentarian and would allow for passage without any Republican support in the deeply divided chamber.

The Medicare funding initiative is the latest effort by Democrats to pass some aspects of President Joe Biden’s economic agenda after conservative Democratic Senator Joe Manchin quashed the sprawling “Build Back Better” bill last year.

Manchin and Senate Majority Leader Chuck Schumer have been negotiating the details of a scaled-back package amid solid Republican opposition.

Another source familiar with those negotiations said substantial work still had to be done before an agreement can be reached on the two most difficult portions of the legislative package: a provision on tackling climate change and a tax initiative that is broader than the pass-through tax idea.

The fund that finances Medicare is currently set to be depleted by 2028. Democrats expect their pass-through tax proposal will amass $200 billion and would help make the trust fund solvent until 2031.

This would be one piece of a multi-pronged bill Democrats are hoping to pass this year that also would deal with rising prescription drug prices for seniors, tackling climate change and making other changes to the tax code aimed at high earners.

Senate Democrats on Wednesday advanced a deal that would allow the Medicare health plan to negotiate lower prescription drug prices.

According to the source, high-earning businesses, such as law firms, have found a way to claim only a small portion of their earnings and thus avoided most of the taxes they otherwise would pay.

(Reporting by Rose Horowitch and Richard Cowan; editing by Andy Sullivan and Aurora Ellis)

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