Stop the Student Loan Interest Rate Hike Act of 2012--Motion to Proceed

Floor Speech

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Mr. REED. Mr. President, after months of working to ensure that the subsidized student loan interest rate does not double this summer, I think we finally have reached a consensus--middle-income families in America cannot afford a huge increase, a doubling in the interest rate on student loans.

Those who were previously opposed or indifferent to our proposal now are in favor of stopping the doubling of the rate. The most prominent, of course, is the former Governor of Massachusetts, Mitt Romney, who said: ``I fully support the effort to extend the low interest rate on student loans.'' I think that is the consensus. It was hard fought. I submitted the legislation to keep the rate at 3.4 percent originally in January. Now we have reached that consensus.

But the debate has now shifted to how do we pay for it. What I have proposed, and am joined by many colleagues, is to close a loophole that has allowed a self-selected few to avoid paying their fair share of payroll taxes.

The alternative proposed on the other side goes to critical health care benefits for lower and middle-income families. It seems to me entirely unfair to try to provide help to middle-income families by taking away their access to health care. For families who are struggling, education and health care are not something that can be traded one for the other.

Congress should not raise the interest rate on these loans. We have reached that agreement. It is a de facto tax on middle-income families. We have put forward a plan that will avoid the doubling of the interest rate on student loans and will pay for it in a responsible way. We are offering a short-term solution to a long-term problem. But we have to begin. We have to do it quickly. If we do not act before July 1, the interest rate on these loans will double for every loan granted thereafter.

Our proposal is to close a loophole that the General Accounting Service has identified as glaring and, frankly, not substantiated by any need. This loophole involves Subchapter S corporations or S-corps. Immediately, when we say S-corps, we think it must be the local manufacturer or the hardware store and how can we go ahead and impose any further taxes, any further costs on these job creators.

This is not the situation. What is happening is that a very clever and bright group of people have figured out a way to use the S-corp to avoid payroll taxes. It is a small subset of corporations that are doing this, and our proposal is targeted. It is targeted only to those S-corps that derive 75 percent or more of their gross revenue from the services of three or fewer shareholders or where the S-corp is a partner in a professional service business.

Essentially, this is a small group of people who derive 75 percent or more of their gross revenues from providing professional services. It is lawyers, accountants, lobbyists, and folks such as that. The proposal only applies to S-corps or partnerships in the field, where virtually all the earnings are attributable to the performance of services. This is not the local manufacturer, not the local hardware store, not the local dry cleaner or gas station. These are people who perform essentially professional services.

They are avoiding their payroll taxes, and we do not think that should be the case. Furthermore, this proposal exempts S-corp shareholders, partners, and partnerships with modified adjusted gross incomes below $250,000 for joint filers and $200,000 for individuals. So it is targeted within this small subgroup of S-corps to an even smaller group, those who are making $250,000 and above as joint filers or $200,000 and above as sole filers.

This proposal prevents professional service income from being mis-char-acterized to avoid employment taxes. However, legitimate passive income--if the S-corp is earning income from rents, from dividends, from interest, and certain other gains, those will be essentially treated as such and will continue to be exempt from payroll taxes.

All we have done is close a glaring loophole, done it in a way in which we do not impact anyone making under $200,000, anyone, frankly, who is involved in a corporation whose principal activities are not professional services. I think this is a responsible way to do it. This is a way that can, in fact, respond to the need to responsibly fund this provision for maintaining the student loan interest rate.

The GAO found that in 2003 and 2004 tax years, individuals used this loophole to underreport over $23 billion in wage income. The median unreported amount was $20,127. For most students, that would cover tuition. Let me say this again. What the GAO found was that using this device as an S-corp, people were able to transform what normally would be $20,000 in payroll wages or salaries that would be subject to payroll taxes into a distribution of an S-corp, avoiding payroll taxes.

This is a loophole. There is no other word for it. We are closing it, and we are closing it in a way that is responsible and that will have virtually no impact on the businesses on Main Street USA. In fact, I think if we tried to explain to anyone running the local store that there are some folks out there who were using S-corps to avoid their payroll taxes, they would be, if not shocked, they would, at least, raise objections to that practice, frankly.

So closing this loophole will fully offset the $5.9 billion cost of this 1-year extension on the interest rate and would make the Tax Code more fair. It is a win-win proposition. In fact, according to Citizens for Tax Justice, in their words, closing this loophole will actually help most small businesses, which are currently subsidizing the minority who abuse it to avoid payroll taxes. So I think this is not only the right thing to do in terms of the policy of not doubling the interest rate on student loans, this is an appropriate way to do it, an appropriate way to pay for it.

Even Governor Romney recognizes that at times S-corps have to pay their fair share. This is a quote from the Boston Herald of January 6, 2008.

``When Mitt Romney became Governor in 2003, Subchapter S corporations that were owned by Massachusetts business trusts were taxed at 5.3 percent. By the time Romney left office, the tax rate on these corporations had climbed to 9.8 percent, with Romney declaring the tax increase to be merely `closing loopholes.' ''

We are urging that the Governor be consistent both in support for avoiding the increase in the student interest rate and closing loopholes in Subchapter S corporations. Both parties must work to find a way to do this. The good news is there is now consensus that it must be done. I am prepared, and I hope my colleagues are prepared to work for a way to pay for it which is fair, which does not take from one middle-class program to offset another middle-class program. We should work together to get this done as soon as we return.

I yield the floor.

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