Ron Johnson defends pass-through tax provision as Democrats accuse him of doing the bidding of his top donors

Bill Glauber
Milwaukee Journal Sentinel

In the face of withering criticism, U.S. Sen. Ron Johnson pushed back Wednesday at assertions that he forced a tax cut provision through to benefit wealthy Americans, including two of the biggest forces in Republican politics in Wisconsin and nationally.

Johnson was on the defensive Wednesday after ProPublica reported on his efforts to get the so-called pass-through provision included in President Donald Trump's signature 2017 tax legislation

ProPublica said that Dick and Liz Uihlein of Pleasant Prairie-based packaging company Uline and Diane Hendricks of Beloit-based ABC Supply "contributed around $20 million to groups backing" the Republican senator's 2016 reelection campaign.

"The expanded tax break Johnson muscled through netted them $215 million in deductions in 2018 alone, drastically reducing the income they owed taxes on. At that rate, the cut could deliver more than half a billion in tax savings for Hendricks and the Uihleins over its eight-year life," the report said.

During the crafting of the 2017 tax cut bill, Johnson pushed for a tax break for small businesses and other so-called pass-through entities. In these businesses, profits pass-through to the owners who pay taxes on their personal returns.

“My support for ‘pass-through’ entities — that represent over 95% of all businesses — was guided by the necessity to keep them competitive with large publicly held ‘C-corporations’ and had nothing to do with any donor or discussions with them," Johnson said in a statement.

“As someone who spent 31 years building a successful manufacturing company in Wisconsin, I have long said that our tax system needs to be simplified and rationalized," he added.

Pacur LLC, the Oshkosh-based plastic company that Johnson helped found, was structured as a pass-through business. Johnson disclosed in his official statement of economic interest that he sold his interest in the business for between $5 million and $20 million in 2020. He said the deal had been in the works since 2018.  

ProPublica reported that a small group reaped most of the benefits of the pass-through provision. 

"Proponents touted it as boosting 'small business' and 'Main Street,' and it’s true that many small businesses got a modest tax break. But a recent study by Treasury economists found that the top 1% of Americans by income have reaped nearly 60% of the billions in tax savings created by the provision. And most of that amount went to the top 0.1%. That’s because even though there are many small pass-through businesses, most of the pass-through profits in the country flow to the wealthy owners of a limited group of large companies."

Democrats who are angling for their party's nomination in a closely fought U.S. Senate race next year quickly pounced on the ProPublica report.

They excoriated Johnson, who has not yet said if he will run for reelection.

Outagamie County Executive Tom Nelson tweeted that Johnson is "not a fiscal conservative, he's a corrupt errand boy for the ultra rich."

In a statement, Lt. Gov. Mandela Barnes said that it was "disgraceful that Senator Johnson used his office to enrich some of his wealthiest political donors while raising taxes on the middle class — and widening the income equality gap across our state."

Alex Lasry, on leave from his job as a Milwaukee Bucks executive, accused Johnson of selling his vote for the 2017 tax deal.

"We always knew that Ron Johnson had sold his vote on the Trump tax scam, now we know that he did it specifically for his two biggest campaign funders," Lasry said in a statement. "Corporations should earn their tax cuts by paying their workers at least $20 per hour and sourcing their supply chains here in America, not by paying off Ron Johnson."

The Senate campaign for Wisconsin Treasurer Sarah Godlewski criticized Johnson for blocking "financial help for Wisconsin working families hammered by the pandemic," while also claiming the senator has "been a cash cow for his powerful billionaire donors."

"It's the very definition of corruption," said Megan Simpson, the Godlewski campaign manager.

Johnson defended his actions.

“The measure I fought for and got included in the 2017 Tax Cuts and Jobs Act prevented an unfair differential from growing worse by providing ‘pass-through’ business income relief to partly match what was provided to C-corporations," he said in the statement. "Earnings at C-corporations saw a tax reduction via the corporate income tax rate from 35% to 21%, while earnings at pass-through corporations would have been taxed at a top personal income rate of 38.5%, a great competitive disadvantage.

"The original pass-through deduction would have effectively reduced this rate to 35.6% for pass-through entities, still a large disadvantage. My effort reduced the rate on pass-through income to 29.6%, still higher than the rate on C-corporation earnings but less of an unfair differential," he said.

'A sclerosis in American democracy'

Marquette University political science professor Philip Rocco said the episode reveals problems in the present political system.

"It's a sign to me of a sclerosis in American democracy, where the major source of policy entrepreneurship and ambition rests on behalf of a very narrow class of people," he said, adding "you should rarely see a piece of legislation like this, but this kind of process is becoming more common."

Matt Rothschild, executive director of the Wisconsin Democracy Campaign, a watchdog group that tracks money in politics, claimed Johnson "acted as a servant to his big donors in the most grotesque way," and they received "a huge return on their investment."

"He's not the first politician to do a favor for his donors, but this is one of the most egregious examples in the history of politicians rewarding their donors," Rothschild said. 

Jay Heck of Common Cause Wisconsin called the tax provision "one of the most glaring examples of quid-pro-quo pay-to-play politics I've ever seen."

"The idea a U.S. Senator would stand in the way of a major initiative of his own party on a very specific provision of a complicated tax bill, and the fact it benefited two of his largest donors, I just think is pretty eye-opening," he said. "My goodness what a great investment for the Uihleins and Diane Hendricks."