Congressional Democrats and the White House have agreed to pay for a bill to freeze student loan interest rates for a year by raising taxes on so-called S Corporations, according to a top Senate Democrat and senior House and Senate aides, but Republicans said the tax increase may ensure the bill’s defeat in the Senate.
“We’ve got it worked out,” Senate Health, Education, Labor and Pensions Committee Chairman Tom Harkin, D-Iowa, said on Tuesday of the formula for paying for the legislation. Harkin spoke after Senate Majority Leader Harry Reid, D-Nev., said he will introduce within the next day a bill to prevent interest rates from doubling to 6.8 percent on July 1. That sets up Senate action on the bill next month after senators return May 7 from a one-week recess. A spokesman for House Minority Leader Nancy Pelosi, D-Calif., said she and House Education and Workforce ranking member George Miller, D-Calif., also signed off on the proposal.
The bill will require S Corporations with three or fewer shareholders who declare income of at least $250,000 a year to pay employment taxes, according to Harkin and Democratic staffers involved in the talks. An S Corporation is a specially structured entity that pays taxes under rules that allow earnings or losses to be passed through shareholders, reducing federal tax payments.
“This a loophole that needs to be closed anyway,” Harkin said.
Presumed GOP presidential nominee Mitt Romney on Monday embraced President Obama’s call for freezing interest rates on student loans for one year, but Republicans said GOP backing in Congress will hinge on how the bill is paid for.
“I don't think anybody believes this interest rate ought to be allowed to rise,” Senate Minority Leader Mitch McConnell, R-Ky., said Tuesday. “The question is, how do you pay for it? How long do you do the extension?”
Republicans are “in the process of discussing it among ourselves,” McConnell said.
Democrats said that Republicans on the Select Joint Committee on Deficit Reduction -- the so-called super committee -- claimed last fall they would consider raising a tax increase on S Corporations. But several GOP aides said the Democrats' decision to attach the offset will ensure strong GOP opposition and the bill's defeat in the Senate. A McConnell spokesman noted Republicans have blocked similar proposals before and said any plan that diverts payroll tax revenue used to fund Social Security would be unacceptable to most Republicans.