Senator Pat Toomey joined me this morning to talk about the tax bill, and before that, relief for Puerto Rico and the NFL’s dilemma:
HH: Joined by United States Senator Pat Toomey of the great state of Pennsylvania. Good morning, Senator Toomey, always a pleasure to have you.
PT: Good morning, Hugh. Thanks for having me.
HH: I want to talk tax cuts mostly with you, but before that, two big issues – Puerto Rico and the NFL. First of all, do you believe everything that can be done is being done for people in Puerto Rico?
PT: I don’t think we’re quite there, yet. I don’t. For instance, we should suspend the Jones Act. That would make sure that we’ve got maximum shipping capacity, because Puerto Rico needs, has dire needs for all kinds of materials and equipment and supplies, and I think we need to get that to the island. So that would be one thing that would be very constructive.
HH: Now does the President have the authority to do that unilaterally? I don’t know the Jones Act well. Or does that require Congressional approval? And if the latter, when’s it coming?
PT: No, I’m sure the President has that authority, because presidents have, in fact, I think this president suspended the Jones Act in order to help the recovery in Texas and Florida. It has, it’s kind of, honestly, it’s a routine matter after a really severe natural disaster along a coastline. And I suspect that it’s coming, but I am a little surprised that it hasn’t happened, yet.
HH: All right, that’s a good note, and we’ll follow up on that. Let’s turn to the NFL. You are from the great state of Pennsylvania, sadly home a franchise that has tormented my Browns for years, but now caught in the crossfire, the Steelers nation.
PT: Yeah, yeah.
HH: And the Eagles, two of them – what do you think the NFL should be doing at this point, if anything about this issue?
PT: Well, I think there ought to be candid conversation about an appropriate way to protest, and inappropriate ways to protest things that you might disagree with. The problem I have with this idea of kneeling during the National Anthem is to me, it, you know, it takes a series of what I believe are isolated incidents, and it then sort of projects this as a damning message about America as a whole. I mean, our flag and our National Anthem represent all of us and our history and the greatness of this country, and its continuous striving to be an ever greater country. And to take a knee because you think there are some cases of police brutality, I’m sure there are some individual cases of police brutality. But it seems to be a wild and excessive extrapolation to protest that the way they do. So I think it’s very, very poor judgment, and I would hope that these guys would figure that out.
HH: Now a senator from a state with two NFL teams is going to have heard from a lot of different people’s reactions. I’ve been hearing all week long that the NFL doesn’t quite get the thin ice that it’s on, and that it’s cracking. President Trump may have lit the fuse, but the sound I am hearing is that ice cracking. Do you hear the same thing I’m hearing?
PT: I think the vast majority of people agree with my sort of fundamental analysis. They think these incredibly, incredibly fortunate people who are, let’s be honest, bazillionaires in many cases, multimillionaires in almost all cases, incredibly fortunate because of the opportunities this countries provides, for them to sort of offend everybody who loves this country and this flag, I agree with you. I think there’s a very, very high level of frustration here.
HH: All right, now let’s…
PT: Mind you, I would point out that as I saw it, the Eagles players, virtually all of them, as I saw it during the pregame show last Sunday, were standing.
HH: And there were some teams that did, and the Patriots say they’re going to do it now.
HH: And there’s just all sorts of, when you have hundreds of different people sending hundreds of different messages to 330 million different people, you cannot fairly objectively analyze what was said or done and why.
HH: But I can objectively report reactions from thousands of people, which are extremely negative to the NFL. I mean, that’s just…
HH: That’s reporting, and they’d better figure it out. Let’s talk about the tax cut package which you have co-ownership with Orrin Hatch and many other people. And I want to go to the heart of the opposition, which is going to be people who are going to say that people like me, a pundit, organized a sub-chapter S, or a lawyer, like me, in a law firm, organized as an LLP, are going to get an enormous tax break. Why should sub-chapter S and lawyers, doctors, automobile car dealers go from 39.6% to 25%, Pat Toomey?
PT: Yeah, they’re not going to. So the 25% bracket for what we call pass-through’s, those business entities that are organized, as you suggest, as sub-chapter S and partnerships and the like, that will not be available for personal services professionals. So if you’re a lawyer or an accountant, a doctor, your income is going to be taxed at the individual level, which I hope we’re going to lower. But we’ll be lowering that for everybody, because otherwise, it would be too easy for everybody who’s in the professional services to do exactly as you said, to sort of organize themselves as a sub-chapter S corporation. And that is not the intent. So there’ll be a range of professions that will not qualify for that treatment. And then there’s another consideration. For those that do qualify as pass-through’s, there is probably going to have to be some allocation of pass-through income to the individual accounts, to the individual owners’ personal income returns as we do today, in some portion, because it’s deemed to be wage. And some portion will be deemed to be a return on capital. That is the part that will be taxed at the lower rate. So it’s an oversimplification and not entirely accurate to suggest that all pass-through income is going to be taxed at 25%. That’s not the case.
HH: Boy, that’s a relief, because that’s the hedge fund attack that has begun already.
HH: And I…
PT: Yeah, it’s not going to qualify.
HH: And I would just urge people as you go through this to keep saying we’re not giving a tax cut to $10 million dollar a year people. And if they weren’t a sub-chapter S corporation last year, they’re not going to be one this year and get a tax cut.
PT: That’s exactly right. That’s exactly right.
HH: I don’t know how far, you know, you might have to have a five year waive-in, even, or something like that. But that is, to me, we need this bill. But the most vulnerable part of it is the perception of the pass-through income. Let’s talk about state and local income taxes.
HH: I’ve had chats with leadership. I believe it will damage New York and California. Leadership has told me no, it won’t, because we’re doubling the property, the standard deduction, and we’re making a new deduction for property taxes. And I still think that the high income people of New York and California are going to bolt. I left, you know, already. I’m gone from California. I’m in Virginia now, because of 13.5%, 13.3%, highest adjustable rate. What do you say to those people about the impact on those states?
PT: Well, what I would say is it was never good economic policy to have federal taxpayers, to have everyone across the country subsidize people who choose to live in high tax areas. Now there will be some offsets. There will be an increase in the standard deduction. I hope there will be a slight reduction in everybody’s marginal rates. But I’m not going to say that the people in the very highest local tax jurisdictions might not at, it would be the upper income people, because lower or middle income people very seldom take that deduction. They take the standard deduction. They will be unaffected. But upper income people in very high state and local tax jurisdictions might see some slight tax increase. I think that’s a possible outcome of this.
HH: And so I’m pragmatic about this.
PT: And, but…
HH: And you’re right about the economic theory, but there are reliance damages built into the system. I wrote about this in The Fourth Way, which comes out in paperback just as the tax debate comes up, that people built their lives, and they cannot easily extricate themselves from it, but high wealth people can.
HH: The trouble becomes, the trouble becomes, though, that then states with dependence on income tax, like California and New York, struggle, and the consequence of that is the economic recovery that ought to be propelled into being by this tax cut is imperiled by your two biggest states taking a hit on the chin, because they’re high tax states.
PT: But the alternative is to say we are permanently stuck with a bad system that you acknowledge is not economically optimal, because we don’t ever want to go through the disruption of moving to a more efficient, more rational system. And I just don’t think that’s a good place to put ourselves. And, by the way, I don’t think this is a massive scale. I think this phenomenon of, this possible slight tax increase for very wealthy people who take this particular deduction, and live in high tax states, that is not going to be enough to get in the way of the recovery that I think we’re very likely to have.
HH: Well, the response to that, I do believe it is a problem in California, where if you rattle bond markets, it’s so heavily dependent on income tax revenues with their 13%-plus highest rate on the super wealthy of Silicon Valley or exceptionally mobile and movie producers and other people like that, that you actually can trigger an economic crisis, which will disadvantage California bonds, which will cause a run on the bank. I think that’s a real problem. But the false choice you just presented, I want to push back on. It’s not an either/or. Usually, transitions allow people with reliance damages to adjust. That means we will take away…
HH: …1% for 100 years, or 10% for ten years or something. Can’t they transition the loss of these deductions?
PT: Well, you could, but I still think that you’re overestimating the negative impact. The budgetary impact of California is only going to manifest itself if these wealthy people decide to leave. I don’t think that’s going to happen all of a sudden. It may not happen on much of a scale at all. But they’d have to actually leave to have that adverse impact on the budget of California. That itself would probably be a gradual thing that would happen over time, if it’s going to happen, and I doubt it. But let me put it this way. If I’m wrong, and the analysis suggests that this is going to have a big impact, then we’d have to consider whether we should phase it in over time. I think that’s a reasonable…
HH: That’s all I’m looking for.
PT: Yeah, it’s, if the magnitude…
HH: That’s all I’m looking for.
PR: …looks like it’s going to be that big.
HH: If there’s a 5% chance of 100% default, you have to take precautions, which brings me to the casualty loss deduction, apparently gone. I’m stunned by this, Senator Toomey. You can’t get rid of the casualty loss deduction. That’s not tenable, is it?
PT: So wait a minute. So you mean the loss for, explain what you mean, exactly.
HH: Catastrophic loss of, for example, a home to Irma, etc.
HH: I believe it’s gone in what I’ve seen.
PT: I, see, we have not gotten to that level of specificity. I’m not, I don’t know how we’re going to handle that, and I do not, I will tell you on the Ways, on the Finance Committee in the Senate, there has not been an agreement that that’s gone. I think that’s, you know, that would be problematic. I hear your point on that.
HH: Well then, okay…
PT: Don’t assume that that’s done.
HH: Then that leads to this question. All right, then that leads to this question. In order to get this done, I have been told by leadership you’ve got to get the House to move in October, the Senate to move in November, the conference to agree in December, and the President to sign it by New Year’s Eve. And if you haven’t gotten to that level of detail, and K Street is just putting on their shin guards, how in the world are you going to get this done?
PT: Now, believe me, there’s been an awful lot of work that is done. We are working, we’re meeting every day in these committees. The staff is working very, they’re doing yeoman’s work around the clock. I think it can come together.
HH: And so you believe this, because this would be an enormous economic boost. And by the way, one big win wipes out a lot or pratfalls, right?
PT: Yeah. Yeah.
HH: So what’s your degree of optimism? I asked Marc Short yesterday if the President was calling a Babe Ruth moment, pointing to the fence and telling them where he put it. Marc kind of said no. How about Pat Toomey? Is this a Babe Ruth moment? Are you calling your fence?
PT: I think so. I really do. I think we’re going to get this done. I think we believe we absolutely have to get this done. We owe it to the American people, because this can really release some strong economic growth, and raise the standard of living of the people that I represent. And I think everybody gets the urgency. We are going to mark up a budget in the Senate Budget Committee next week. We’re going to have the budget on the floor the following week. As you know, the budget is the device that allows us to pass subsequent tax reform with a simple majority. That is on track. That is moving. The tax bills are being written at the same time. Look, can I guarantee that it’s going to happen before the end of the year? No, I can’t.
HH: Babe Ruth did.
HH: Is this a Babe Ruth moment?
PT: Yeah, well, I can’t absolutely guarantee it, but I’m confident, Hugh.
HH: All right, Senator Pat Toomey, great to talk to you, as always. Come back early and often during this discussion. Candid, to the point, knowledgeable, gosh, I love Pat Toomey.
End of interview.