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Mr. HARKIN. Mr. President, I can't emphasize strongly enough the importance and the urgency of the legislation before us--the Stop the Student Loan Interest Rate Hike Act of 2012--which the majority leader spoke about. On July 1, unless Congress intervenes, the interest rate on Federal student loan debt is set to double from 3.4 percent to 6.8 percent. More than 7.4 million American students, including an estimated 255,000 students enrolled in Iowa colleges and universities, will be required to pay an average of $1,000 more per year of school.
The bill before us is straightforward and it is fully paid for. It keeps the interest rate at 3.4 percent, and the cost is offset by closing a tax loophole that benefits certain high-income professional service providers.
I wish to thank Senator Reid for his leadership in advancing this critical legislation. I also thank President Obama for making this legislation an urgent priority and for visiting college campuses across the country to speak out on this urgent problem facing our Nation's students and their families.
In today's global knowledge-based economy, an education beyond high school is no longer an option but a necessity. A worker with a bachelor's degree earns 85 percent more, on average, than a high school graduate. Almost two-thirds of the job vacancies between now and 2018 will require some postsecondary education, and more than half of those jobs will require at least a bachelor's degree.
You can see by this chart, as I said, 63 percent of the jobs will require at least some college education--either some college, an associate's degree or bachelor's degree or more. And that is by 2018. The demand is going to grow even beyond that. These statistics convey a very clear message: Higher education is the key to entry not only to the middle class but to a middle-class life.
Another message is equally clear, and that is America's economic competitiveness and growth depends on a highly educated and highly skilled workforce. That is why the ever-growing mountain of student loan debt is a major concern to me as the chair of the Health, Education, Labor and Pensions Committee, and also a major concern for families all across America who are struggling to get by. It is a shocking fact that total student loan debt has now surpassed total credit card debt for the first time ever, with $867 billion right now in student loans, auto loans at $734 billion, and credit cards at $704 billion. So for the first time ever, American families now owe more on school loans than they do on their car loans or on their credit cards.
Again I want to bring this closer to my own home. It affects Iowans profoundly. Nearly 72 percent of Iowa's college graduates have debt--the fourth highest percentage in the Nation. And those borrowers have an average of $30,000 in student loan debt, which is the third highest level in the Nation.
Over the past 3 years, President Obama and Congress have taken robust steps to improve college affordability and help our students succeed. From the Recovery Act and its unprecedented support for our education systems, to the student loan reforms that enabled us to help more students through larger Pell grants, and most recently our efforts to make it easier for students to repay their loans--this all happened in the last few years--we have made major strides toward the President's goal--and I hope it would be our shared goal--of reclaiming America's standing by 2020 as the country with the highest proportion of college graduates. Needless to say, it will be much harder to reach this goal if Congress allows interest rates to double on July 1.
As I said, more than 7.4 million American students will be required to pay an average of $1,000 over the lifetime of their loan for each year they borrow. Again, if you look at this chart, it shows what is happening. If the interest rate is paid at 3.4 percent, we are looking at about $883 in interest over the life of the average loan. Double that interest rate and it goes to $1,876. That is at 6.8 percent. So the average savings to the average student would be almost $1,000 a year.
I might add that the 255,404 borrowers in Iowa will save an estimated total of $254 million with this bill in front of us.
With today's tough economy, and given the very high unemployment rate among young Americans, it is absolutely unacceptable to ask middle-class families to shoulder sharply higher student loan interest payments. We must not allow this to happen.
If we look closer at the characteristics of students who will be impacted by this interest rate hike, we see that it affects middle-class families and vulnerable students from disadvantaged backgrounds at the very time when they are under enormous financial strain. If we look at who gets the subsidized loans, from this chart we can see, by family income, dependent students, their family income is less than $60,000 a year.
If we look at the independent student loan borrowers, their income is less than $50,000 a year, and 89 percent of them earn less than $50,000. Of the dependent student loan borrowers, 60 percent are from families who earn less than $60,000. I might also add that 7 out of 10 of those independent students here reported under $30,000 a year in income.
So allowing the interest rate to double would also disproportionately affect minority students who account for 40 percent of these borrowers. So 40 percent of these borrowers are minority students. This bill, again, would prevent the interest rate from doubling on July 1 for those borrowers.
So with the bill before us, we are considering a pragmatic and fiscally responsible solution to this problem that will keep interest rates low for more than 7.4 million students. Again, the bill is fully paid for, and we offset the cost by raising revenues in a way that will provide a solution to a longstanding problem in the Tax Code that has been subject to widespread abuse.
Now, let me just define how this measure is paid for. For many years we have seen avoidance of properly owed Social Security and Medicare taxes by some subchapter S stockholders who can declare that a portion of their income is effectively profit and therefore not subject to Social Security or Medicare taxes. This is not supposed to be a choice that is made at the whim of the taxpayer. It should be based on objective facts. The offset in this legislation does just that. It creates a bright-line test for a small share of subchapter S shareholders--basically, those engaged in professions such as doctors, lawyers, accountants, consultants and lobbyists--whose financial gains they have come from the work they do.
It is narrowly tailored to cover only those subchapter S organizations in which there are three or fewer stockholders, and only for those earning $250,000 on joint filings. With this bright-line test, the Medicare and Social Security trust fund will receive the funds that are properly owed, which are not received today because they are counted not as income but as profits.
My friends on the other side of the aisle have proposed a different offset to pay for keeping the interest rate at 3.4 percent. The bill that passed the House of Representatives and the legislation proposed by Senator Alexander of Tennessee would offset the cost of this bill by eliminating the Prevention and Public Health Fund which was created by the Patient Protection and Affordability Care Act.
In short, rather than put an end to a widespread abuse of the Tax Code, my friends on the other side of the aisle are proposing that we eliminate the sole dedicated source of Federal funding for critical investments in preventing disease and keeping women and children and elderly families healthy. They want to eliminate the Prevention and Public Health Fund.
Many of my Republican colleagues have acknowledged the critical importance of investing in prevention and wellness, which makes the use of this offset that is eliminating it all the more troubling. Preventing disease, expanding access to screenings, encouraging people to stop using tobacco--these used to be bipartisan goals strongly supported by a vast majority of Republicans and Democrats alike. So in the affordable care act we created the prevention fund, with the express goal of ramping up our investments in these prevention and wellness initiatives, again, with Republican support.
Here are quotes from two Republican leaders. Senator Kyl, on July 12, 2010, just a few months after we passed the affordable care act, said:
One of the things we did in the health care legislation was to provide a lot of different incentives for preventive care, for screening to try to help people avoid illnesses on the theory that it would be a lot cheaper if we didn't do a lot of treatment that was unnecessary.
I couldn't agree more.
The Republican leader, Senator McConnell, said in an op-ed the same year, 2010:
Congress should be able to work together on our practical ideas that the American people support, such as ..... encouraging wellness and prevention programs that have proved to be effective in cutting costs and improving care.
That was less than 2 years ago, right after passage of the health reform law. But now Republicans are making outrageous partisan attacks on the prevention fund. I find
this deeply disturbing and disappointing. It is not hard to imagine the message gurus, those who hone messages, telling Republicans: Here is all you have to do. Just smear the prevention fund by calling it a slush fund.
How many times have I heard that: the prevention fund is a slush fund? I have heard it in committee, I have heard it on the floor, I have seen it in print, Republicans calling the prevention fund a slush fund. Well, this is shameful. That term ``slush fund'' is a malicious untruth. Nothing could be further from the truth. The truth is the prevention fund has been a giant step forward for public health in our Nation.
Typically, prevention and public health initiatives are an afterthought. This means important community-based interventions often go unsupported. The prevention fund is making it possible for us to make national investments in evidence-based programs that promote physical activity, improved nutrition, and reduced tobacco use. Well, these are the investments we make.
This prevention fund, which Republicans want to eliminate, invests $226 million to reduce chronic diseases, including diabetes and heart disease. That minimizes the $440 billion a year in health care costs from heart disease alone. It invests $93 million for antitobacco education and support campaigns to minimize the fact that over 6 million kids will die from smoking if the current rates persist. It invests $190 million for childhood immunization programs, again, to minimize the $3 billion a year in unnecessary health care costs right now.
I might just add the lead editorial in today's New York Times said, ``No Longer Just `Adult Onset'.'' That is the head of it. I will not read it all, but I think there are a few pertinent paragraphs in the Times editorial. It starts off by saying:
A study of diabetes in overweight and obese youngsters bears an ominous warning about future health care trends in this country. It found that Type 2 diabetes, a new scourge among young people, progresses faster and is harder to treat in youngsters than in adults. The toll on their health as they grow older could be devastating.
This new study was published in the New England Journal of Medicine. Reading further:
Some experts suggest that young patients at risk of diabetes need to be detected earlier and treated more aggressively. But the long-term goal should be prevention of obesity and of diabetes.
Congressional Republicans, meanwhile, are bent on dismantling health care reforms that could greatly assist in curbing the obesity epidemic. The Republican-dominated House last month narrowly passed a bill that would eliminate a Prevention and Public Health Fund, established under the reform law, in part to pay for lowering the interest rate on subsidized student loans for this year.
The fund is already providing grants to state and local governments to help pay for programs to fight obesity and prevent chronic diseases, including diabetes, in the community, the workplace and among minority groups that have high rates of obesity and diabetes. Killing off this program would be hugely costly to Americans' health and future health care costs. There is no explanation for this move, except for the usual anti-health care reform demagoguery.
I ask unanimous consent to have printed in the Record a copy of the full editorial.
There being no objection, the material was ordered to be printed in the RECORD,
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Mr. HARKIN. I don't know that I can make it any more clear than the New York Times editorial, and there is not the time to mention all of the ways this fund is already making Americans healthier. But I want to mention several representative investments that are happening, again, right now.
I mentioned those right here, the $226 million for diabetes and heart disease, the $93 million for antitobacco education, the $190 million, again, for childhood immunization programs.
I might just go back to that first on the heart disease because heart disease disproportionately affects women. Most people don't know that. I think most people would say the No. 1 cause of death in women today might be breast cancer. Not so. The No. 1 cause of death for women in this country is heart disease. Some 42 million women in America are currently living with some form of heart disease, and the World Health Organization estimates that a staggering 80 percent of heart disease, diabetes, and stroke could be prevented just from changes in smoking, nutrition, and physical activity alone. That is what this prevention fund is doing right now.
Moreover, this investment by the prevention fund isn't only saving lives, but it is saving money. Right now, heart disease costs our Nation about $440 billion a year. We can reduce those costs.
I might also mention smoking. Cigarette smoking also kills an estimated 173,000 women every year. If current smoking rates persist, more than 6 million kids will die from smoking.
The new national antitobacco ad campaign called Tips From a Former Smoker is being supported by this prevention fund. I think many of us probably have seen these ads. They are extremely powerful and effective ads, and they are going to save lives. In fact, this ad campaign is expected to inspire a half million quit attempts and help at least 50,000 Americans quit smoking forever.
I might just add that within 2 days of these ads first appearing, the number of phone calls to quit-smoking lines tripled from people who wanted help in quitting smoking.
I mentioned the immunization programs for kids. These investments from the prevention fund aren't just at the national level, they are also in our communities. This fund is helping States and cities and towns to implement evidence-based programs that meet their particular local needs.
For example, in Illinois, the State has made improvements to its sidewalks and has marked crossings to increase levels of student physical activity. Because of these improvements, the number of students who are walking to school has doubled. That is a good thing. So not only is this good for their health; it is expected to save the school system about $67,000 yearly on bus costs.
In Mobile, AL, Mobile County officials enacted a comprehensive smoke-free policy expected to protect 13,000 residents and visitors from being exposed to secondhand smoke.
All across America, the prevention fund is investing in proven, locally developed programs that promote health and wellness. These evidence-based programs not only improve health but, as I said, will help us save money in health care costs.
According to a new study by the Centers for Disease Control and Prevention, programs such as the National Diabetes Prevention Program could prevent or delay nearly 885,000 cases of type 2 diabetes, saving our health care system about $5.7 billion over the next 25 years. The National Diabetes Prevention Program is a public-private partnership of health care organizations working together to prevent the type 2 diabetes the New York Times editorial was talking about. Given that in 2007 diabetes alone accounted for $116 billion in direct medical costs, it is critical we continue these investments.
Again, here is how this investment is returned, the return on investment for public health care spending. For every $1 spent on childhood immunizations, we save $16.50--proven; tobacco control programs, for every $1 we save $5; for chronic disease prevention, for every $1 we save $5.60; for workplace wellness programs, $3.27. If we want to look at it just in terms of dollars and not just in terms of lives, we are saving money also.
The prevention fund's investments in cancer prevention also provide an opportunity to save lives and money. In 2007, the direct and indirect costs of cancer, which account for nearly one out of every four deaths in the United States, totaled about $123 billion. Earlier this year, researchers found nearly half of U.S. cancer deaths could be prevented--again, through the kinds of programs the prevention fund is funding today. Preventable U.S. cancer deaths, about 50 percent; preventable deaths from heart disease, diabetes, and stroke, about 80 percent. This is what the prevention fund is going after. For the life of me, I have never understood those who want to get rid of the prevention fund, yet are willing to pump untold billions, trillions of dollars into patching, fixing, mending surgery and health care costs down the line. Perhaps my friends on the other side of the aisle never learned the old axiom of Ben Franklin about an ounce of prevention is worth about a pound of cure. Here, an ounce of prevention is worth about 10 pounds of cure or more.
The list goes on. Recently, the Trust for America's Health released a study showing that a 5-percent reduction in the obesity rate could yield more than $600 billion in savings on health care costs over a 20-year period of time--a 5-percent reduction. Studies such as this one confirm what common sense tells us, that prevention is the best medicine for our bodies and for our budgets. That is why nearly 800 organizations have spoken out against these misguided efforts to slash or eliminate the prevention fund. These organizations, such as the Young Invincibles, the U.S. Student Association, the American Diabetes Association, the Campaign for Tobacco-Free Kids, have all said: No, don't cut, don't eliminate the prevention fund.
Despite misguided efforts to cut or eliminate the Prevention and Public Health Fund, most Americans understand what is at stake. Prior to the prevention fund, for every $1 spent on health care, 75 cents went to treating people with chronic illnesses and only about 4 cents went to prevention: 75 cents taking care of people later on with chronic diseases that are preventable, only 4 cents out of every $1 went to prevention. This underinvestment has had devastating consequences. Nearly half of American adults have at least one chronic condition. Yes, you heard me right. Nearly half of American adults have at least one chronic condition, and two-thirds of the increase in health care spending between 1987 and 2000 was due to the increased prevalence of chronic diseases. So two-thirds of our budget, of the increase in spending, is on chronic diseases. Yet since we can reduce those chronic diseases through prevention, one would think we would want to increase that 4 cents a little bit--4 cents on the $1 we are spending right now. This prevention fund gives us an unprecedented opportunity to bend the cost curve.
How many times have I heard about bending the cost curve in medicine? The best way to do it is to prevent chronic diseases. The transformation of America into a true wellness society, a society that focuses on preventing diseases, saving lives and thereby money is the most cost-effective way to proceed. As we can see, to slander the prevention fund as a so-called slush fund is a shameful mischaracterization. This fund is saving lives and saving money. Eliminating this fund--as proposed by my friend from Tennessee--would be bad public policy, a serious case of misplaced priorities. The very idea that Republicans would slash prevention in public health care so a small group of high-income taxpayers can continue to abuse the Tax Code I find simply unacceptable.
Before I close my remarks, I would like to address an egregious mischaracterization that I have heard from the other side of the aisle. Some Republicans claim Democrats, in our historic reform of the student loan program, took money that had been going to students and used it to pay for the health care bill. I have heard that a lot of times. Again, that is simply not so. The reforms passed by Democrats in Congress--I might add over vehement Republican opposition--did not take a single dime from students. Instead, the
bill eliminated wasteful, taxpayer-funded subsidies to banks by converting all new Federal student loans to a more stable, reliable, cost-efficient direct loan program and redirected that money to students, to deficit reduction, and some important health care reforms.
The money did not come from students. The money came from the subsidization we have been giving to banks. Specifically, thanks to the huge savings generated by eliminating wasteful subsidies to banks, what we were able to do with that--we provided increases in the maximum Pell grant award to keep up with inflation. We provided funding for minority-serving colleges and universities. We made a major investment in community colleges, creating a community college and career training grant program. We were able to make loan repayment more manageable by capping a new borrower's loan payment at 10 percent of their net income and, for some, forgiving any remaining debt after 20 years of payment.
That was all done by stopping these wasteful subsidies to banks and putting it into the direct loan program. Again, we provided more than $10 billion in deficit reduction at the same time we were able to expand the Community Health Center Program to ensure access to lifesaving medications and to expand vital consumer protections to millions of Americans with private health insurance--protections we put in such as banning lifetime limits, requiring dependent coverage, prohibiting cancellation of coverage due to an illness. In other words, thanks to the education reform bill, students benefited, the
middle class benefited, taxpayers benefited, and health care consumers benefited. For my friends on the Republican side, had they had their way and had those reforms been defeated, only the banks would have benefited.
Indeed, I kind of detect a pattern. When we Democrats were fighting to end this subsidy to banks so we could dramatically increase college grants and loans for middle-class and disadvantaged students, my friends on the other side of the aisle stood with the banks and did everything they could to kill the reforms. Likewise, today Democrats are fighting to prevent a 100-percent student loan rate hike. We want to fully pay for it by correcting a provision in the Tax Code that allows a small group of wealthy Americans to avoid paying some Social Security and Medicare taxes. Republicans are going to the mat to prevent those wealthy taxpayers from having to pay their fair share. Instead, how do they want to pay for keeping the interest rate down? By gutting the prevention fund, killing it, eliminating it--the very fund that is investing in initiatives to fight cancer and heart disease and to protect the health of our children, our women, and our elderly.
What they are proposing is bad public policy. It is bad priorities. We need to be putting the middle class first. We need to be putting students struggling to pay for college first. We need to be putting public health care and prevention first--put all those out there. To make these things possible, we should ask a small group of wealthy Americans to put their country first and stop abusing this provision, this loophole in the Tax Code. I urge my colleagues to support the Stop The Student Loan Interest Rate Hike Act and to support the offset currently in the bill.
Five years ago, the original law that reduced the student loan interest rate to 3.4 percent passed with overwhelming bipartisan support and was signed by a Republican President. I hope we can find common ground to pass this new legislation with that same kind of broad and bipartisan support.
I yield the floor.
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Mr. HARKIN. I thank the Chair. Mr. President, after listening to the previous three speakers, it is hard to know where to begin to correct the record with all the misstatements. Maybe I will kind of work backward. My good friend, the Senator from Wyoming, gave a whole list of different things about where this money was spent. He mentioned something about California and fast food construction. I did not get it all. But I am informed there was absolutely no money from the Prevention and Public Health Fund that went for that program.
If the Senator from Wyoming has any evidence to the contrary, I would be more than delighted to look at it. Then there was the one about the dogs and cats in Nashville, TN. I thought the newspaper article that was in the Hill newspaper put that one to rest, but I guess it did not. It just goes on and on.
That money actually was funded by private grant money. I guess PetSmart, from what I am told, put that money in for pet spaying and neutering in Nashville, TN. Again, that money did not come from the Prevention and Public Health Fund. If the Senator from Wyoming has evidence to the contrary, I would like to look into that. Then the Senator from Wyoming mentioned the New York Department of Health
using $3 million to lobby in New York for a soda tax initiative. First of all, I will tell my good friend, the Senator from Wyoming, there is an absolute prohibition on Federal moneys being used for lobbying. So if anyone has any evidence of Federal funds being used to lobby, please let us know. We would like to take them to task for that and sic the Justice Department on them.
That did not happen. It was not CDC funding. This was funding by the New York State Department of Health. Again, none of the CDC money we used in the prevention fund was used for that. Those were just three of--I do not how many examples my friend the Senator from Wyoming had, but those are just three of them there that absolutely had nothing to do with the Prevention and Public Health Fund, but somehow this has gotten out in the popular press.
The city of Nashville received a $7.5 million grant to provide free pet spaying and neutering. You put that out there and the radio talk shows pick up on that and all that kind of stuff. Then they bat this around and it gets everyone upset. My God, we are using tax money now to neuter dog and cats in Nashville, TN. Who would not be opposed to that? It is not true. That is all. It is simply not true. As I say, if anyone has any evidence to the contrary, please let me know and we will get the Justice Department after them.
Again, I say to my friends on this side of the aisle that talk about seriousness of whether--how we are going to pay for this. I heard it said by the previous three speakers we all agree the interest rate should not go up. OK. We have before us, as I understand, two choices right now. The Republican choice is the one passed by the House of Representatives a couple weeks ago, which would eliminate the Prevention and Public Health Fund and put that money in to keep the interest rate down at 3.4 percent rather than letting it go up to 6.8 percent.
So they would eliminate the Prevention and Public Health Fund, about which I spoke at length a little while ago. Our bill would close a loophole in the Tax Code that allows certain subchapter S corporations to avoid paying their FICA taxes, their Social Security and Medicare taxes, because of the way they are arranged.
I am going to get into that in a minute and try to explain exactly how that is set up. We are not going after small businesses at all. We are simply providing more of a bright line on what are legitimate dividends from a corporation, which does not have to pay FICA taxes, and what are wages and salaries that they do have to pay FICA taxes on.
Right now, in certain subchapter S corporations, it is kind of cloudy. It is kind of cloudy. As someone on the other side said, we have seen this big increase in subchapter S corporations. Well, of course. People who have had partnerships before or sole proprietorships all of a sudden are rushing to establish subchapter S corporations, with very few stockholders, to get away from paying their legitimate taxes on Social Security and Medicare.
Our bill would close that loophole. We have these two choices in front of us. Which do we want? If those are the only two, do we want to eliminate the Prevention and Public Health Fund or do we want to put a bright line on subchapter S corporations and say if they cross that line they have to pay their Social Security and Medicare taxes? Maybe we can have that vote. Maybe we have to actually have that vote here.
I would like to see if my Republican friends want to eliminate the Prevention and Public Health Fund. Earlier this year, from our committee I passed out to every Member of the Senate how much money went to the individual States and what it was used for in the Prevention and Public Health Fund because I wanted to be transparent and above board. So I pointed out, for example--these are not private things; these are public. I pointed out to my friend from Tennessee that $4,669,362 was made available to Tennessee in this Prevention and Wellness Fund for fiscal year 2011. I listed all the things it went to: community programs to promote healthy living, detection and prevention of infectious diseases, clinical preventive services, strengthening of public health infrastructure, tobacco prevention programs, some to East Tennessee State University for the training and preparing of a public health workforce, Vanderbilt University Medical Center for clinical preventive services.
I get right down to the dollar, where it all went. I am not trying to hide anything. I say to my friend from Tennessee, ask these people where did this money go. We know where it went. Does my friend propose that we cut out all this money that went to the State of Tennessee?
Here is Arizona: $7,758,944 went to Arizona in 2011. I gave this to my friend from Arizona listing exactly where it went and what it went for in prevention and wellness. Does my friend say this ought to be eliminated? Wyoming got $1,785,534. Every bit of it is listed here, exactly where it went.
If we accept the Republicans' proposal, we do away with all of that, all prevention and public health. It has been said on the other side that even our President wanted to do away with or take money out of it. I point out that the President did propose earlier this year as a pay-for for the extension of the unemployment insurance program and for other things to keep tax rates from going up that we take $5 billion out of this program over the life. But I think the President made it very clear that was it.
In fact, we have a Statement of Administration Policy on this bill which states unequivocally that the President will veto this bill if there are any cuts in the Prevention and Public Health Fund. While I was personally opposed to the $5 billion that the President proposed taking out--and was taken out of the fund--I can say that, well, that ought to be the last penny taken out of the Prevention and Public Health Fund. Now we see that the President agrees, no more. We took $5 billion out and that is the end of it.
People keep calling it a slush fund. I have here where every dollar went in all of the States, what it went for. It did not go to neutering dogs in Nashville, TN, regardless of how many times we may read it or hear it on Rush Limbaugh or Joe Scarborough or anyplace else. It is not true. I challenge anybody, if they have that evidence, let's see it.
Again, I just think what the Republicans have offered as an offset is not serious. I cannot believe they want to do away with the Prevention and Public Health Fund. On the other hand, is our proposal serious? Do we want to really close this loophole for professional corporations under subchapter S? Yes, we do. I think that is serious. There has been a lot of abuse of people using the cover of subchapter S to avoid paying their taxes. A number of cases have come before us that I have seen where people have used subchapter S as a means of not paying their fair share of taxes.
One of the examples that just came through was former Senator John Edwards of North Carolina, a former Member of this body, a former Presidential candidate and Vice Presidential candidate. I will not get into his personal life; that is something else. But former Senator John Edwards of North Carolina claimed, over a multiyear period, that $26 million in revenue from his subchapter S corporation was unearned. He claimed he didn't really work for a large share of his income from winning court cases. By making this argument, he avoided nearly $750,000 in payroll taxes.
That is not fair. That is an inappropriate gimmick. It is a gimmick when we allow a professional to give his or her spouse and children 95 percent of the stock in their subchapter S corporation and then declare it their profit and not their work as an accountant or as a lawyer that is responsible for the income. That is a gimmick. That is why people are rushing to form these subchapter S corporations.
We have a recent case where the taxpayer was an S corporation, an accounting practice owned by a CPA and his wife. The CPA served as the corporation's president, treasurer, director, and only full-time accountant but received no salary. Imagine that. He received no salary. Instead, the CPA ``donated'' his services to the corporation and withdrew earnings from the entity in the form of dividend distribution. During the years under audit, the CPA worked for the corporation approximately 36 hours per week. In addition to testifying that his work was crucial to the continued success of the corporation's business, the CPA also indicated that dividends were drawn in lieu of salary to reduce employment taxes. Imagine that. The corporation asserted that the CPA was not an employee, and even if he was an employee dividend distributions cannot be taxed as wages.
Well, he was caught in an audit. But, we know audits are few and far between. So the court found the shareholder to be an employee who performed significant services. His wages encompassed all remuneration for services, and it constituted all wages for tax purposes. That is what is happening. That is what is happening out there.
What does our bill do? Right now, if you are in a subchapter S corporation, you, the person, get to say whether what you are making is income or dividends. I heard mentioned something about Warren Buffett. I don't know his whole deal, but it seems to me that most of his income is from dividends and capital gains. We are not talking about that. We are talking about--this would be--if we took the subchapter S situation and applied it to C corporations, which Mr. Buffett would be in, then Mr. Buffett would face a board with independent people making a decision on officers' salary.
Now with subchapter S corporations with only one, two or three stockholders, they are making their own decisions on their personal taxes, whether they are dividends or salary. What do you think people decide?
Again, an accountant tells a subchapter S corporation it can do 40 percent and it would not get audited, they do 40 percent and don't get audited, and they don't have to pay Social Security or Medicare taxes on what is really gain.
What do we do in this bill? We say: Look, if you are a professional subchapter S corporation and you have three or fewer shareholders, then we draw a bright line. If your income is over $250,000 a year for a joint filer, and if in fact there was earned income, then it would be subject to FICA taxes. That is the bright line that we are drawing. In fact, what it will do is give subchapter S corporations a better idea of whether profits are earning money or dividends.
Quite frankly, not only are we helping to raise money for the Medicare
and Social Security trust funds, we are actually making it better for people out there who may not know where they fall. Is it dividends or is it earned income? Our bill only covers a very narrow share of S corporations. It deals only with certain professional corporations. It doesn't touch manufacturing or retail activities. It doesn't touch real estate activities. It covers the area where the abuse is most prevalent right now.
I want to speak for a minute on what Senator Alexander was talking about earlier about the money that came from
students and whether it was given back to students. He said that instead of 6.8 percent, it would have been 5.3 percent. We voted on that and it failed. So we did speak on that.
Again, what I point out is that most of this money--most of the money that we had in that $61 billion, most of that indeed went for students. I think I had it here--of that $61 billion, $36 billion went to Pell grants, helping raise Pell grants; $750 million went to bolster college access for students through the College Access Challenge Grant Program; $2.55 billion went to Historically Black Colleges and Universities and minority-serving institutions; $2 billion went to community colleges; about $10 billion was used for deficit reduction; $9.2 billion, as I said, went to certain health care activities.
Guess what one of those was that was paid for. Requiring dependent coverage--saying that a young person can stay on his or her parents' health care policy until age 26. Does that help students? Of course it helps students. How many young people who go off to college, and they are in college and maybe drop out a little while to make some money and then go back to college and maybe even graduate, but they don't have a full-time job--they can stay on their parents' policy until they are age 26.
I cannot tell you how many people I have heard from in my State of Iowa who have said what a godsend this is to them and their kids who are students. I make no apologies for the fact that some of this money out of that $61 billion that went to subsidize banks went to help students stay on their parents' health care policy.
When they say some of the money came from students, it didn't. The $61 billion all came from cutting the subsidy to banks. The great bulk of it, all but about--well, $10 million went to pay the deficit down, and $9.2 billion went to things such as banning lifetime limits, requiring dependent coverage, expanding community health centers, that type of thing. So none of it actually came from students themselves. It all came from closing the loophole where banks were making on that money.
The next thing that was said I wanted to correct was that the Medicaid expansion in the affordable care act--100 percent of that expansion is paid for in the Federal side, not the stateside. Senator Alexander talked about this and was saying we are expanding Medicaid, which is a burden on the States. That would be true, but for the fact that 100 percent of this expansion is paid for by the Federal Government. I think that phases down to 90 percent in the future, but it never comes below 90 percent.
If the Senator would like to debate whether Medicaid should be all Federal, or Federal and State, we can do that and maybe even find some common ground on that, but that is not the case before us. I didn't think the debate on this bill to keep student interest rates low would now morph into a debate on health care.
But if you want to have a debate on health care, I will be more than happy to do so, and whether or not we should use money from the Prevention and Public Health Fund to pay for it.
So, again, I would say no money--no money--comes out of the Medicare trust fund to pay for this bill--none--and certainly none comes out of the Social Security trust fund. The money that is raised goes to the Social Security trust fund and the Medicare trust fund. None of it is actually diverted from the trust funds.
Under the budget rules we are operating under, money raised can be used as an offset even though that money is raised for Medicare. I want to make it crystal clear that the money we are raising from closing this loophole on subchapter S corporations, none of it--none of it--actually comes out of the trust funds for student loans or to keep the interest rate low. It does go to the Medicare and Social Security trust funds.
Under the Republican proposal, we would not get any more money into Medicare or Social Security. They would just do away with the Prevention and Public Health Fund and take that money and use it to offset keeping the interest rates low, but not one nickel of that would go to Medicare or Social Security. Our bill would help those trust funds.
So our bill really has three benefits: First, it closes a tax loophole, provides for more definitive application of what is subchapter S income or dividends for a narrow class of companies--earned income or unearned income; second, it provides money to the Social Security trust fund and Medicare trust fund, which is needed; and third, it allows the student interest rate loans, Federal subsidized loans, to stay at 3.4 percent for the next year.
Sometime in the next year, obviously, we are going to have to figure out a long-term fix for this or what we want to do on these subsidized loans in the future and how we are going to pay for this down the road. In the meantime, as everyone has said on both sides, we both agree it ought to stay at 3.4 percent for the next year.
So I guess the debate does revolve around how we pay for it. Again, from my viewpoint--not my viewpoint; the House already voted last week to kill the Prevention and Public Health Fund, and that is what the Republicans are proposing here.
Again, to refer back to where I started earlier this afternoon, I think the lead editorial in the New York Times today was quite clear in talking about the findings found in the New England Journal of Medicine about what is happening with type 2 diabetes and how devastating that is going to be in the future. They said the long-term goal should be the prevention of obesity and diabetes. The editorial said:
Congressional Republicans, meanwhile, are bent on dismantling health care reforms that could greatly assist in curbing the obesity epidemic. The Republican-dominated House last month narrowly passed a bill that would eliminate a Prevention and Public Health Fund, established under the reform law in part to pay for lowering the interest rate on subsidized student loans for a year.
The editorial noted that there is no explanation for this move except for the usual anti-health care reform demagoguery and noted that the fund is already providing grants to state and local governments to help pay for programs to fight obesity and prevent chronic diseases, including diabetes, in the community, the workplace, and among minority groups.
So I guess that is really the argument--how do we pay for it? It comes as no surprise, I am sure, when I say that I think closing this loophole is much better than doing away with the Prevention and Public Health Fund.
With that, Mr. President, I yield the floor.
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Mr. HARKIN. Mr. President, I say to my good friend from Wyoming--and he is my good friend, and we do a lot of good work together--I wish we could have this bill in our committee. I think we could work it out. But the fact is, to raise the money, it has to come from the Finance Committee, and we don't have jurisdiction over that. If we had jurisdiction over that, we could probably work it out. We have a good way of working things out in our committee. But we don't have jurisdiction over finance on this darned thing. If we did, we could probably figure it out.
Mr. ENZI. Could I amend my comments to have the Finance Committee take the bill and work out a solution?
Mr. HARKIN. Well, I think that is where this came from. I don't know.
I would also say to my friend from Wyoming, because I was listening to him, I think it is fair, if we are going to have a vote on ours, that we ought to have a vote on yours. I think that if we are going to have a vote, we ought to have a vote on ours, which is the subchapter S corporation, and see how that falls, and have a vote on whether we want to end the Prevention and Public Health Fund and use that money. I would like to have that vote. I would love to have that vote. I would love to see how my friends on the other side of the aisle want to vote on whether they want to kill the Prevention and Public Health Fund.
I would also say that on this subchapter S corporation issue, the IRS right now audits about one-half of 1 percent of the returns from subchapter S corporations. So they have to think, what are the odds they are ever going to catch me, and if they do, they pay a fine and that is it. The IRS doesn't have the personnel to do everyone.
What we are doing, I wish to say again, just to make it very clear, that because of the sort of fog that surrounds subchapter S corporations right now, the IRS simply can't audit them all. They don't have the personnel to do that, and some claim that there is a lot of questions about whether something is income or dividends. But let me repeat again what our bill does.
We create a bright-line test that affects only a narrow class of subchapter S corporations. It affects only professional subchapter S corporations, those engaged in professions such as doctors, lawyers, accountants, consultants, lobbyists, where the gain is due to the professional work. This provision does not include subchapter S gains from unrelated retail, wholesale or manufacturing activities.
The provision only covers subchapter S corporations where there are three or fewer stockholders. It only covers those earning more than $250,000 a year as a joint filer, and it only covers gains when 75% or more are attributable to 3 or fewer stockholders.
So if a subchapter S company has income that is partially from professional activities, such as lobbying, and partially from other activities, such as real estate investments, the investment income does not fall under the rule.
The Joint Committee on Taxation and the Treasury Inspector General for
Tax Administration have both issued reports that show that underreporting of earned income subject to FICA taxes is a significant issue. Using IRS data, the Government Accountability Office in 2009 calculated that in 2003 and 2004 tax years the net shareholder compensation underreporting amounted to nearly $23 billion. Since then, the number of subchapter S organizations has been increasing rapidly, and I would suggest that is a main reason why.
Lastly, I just wish to point out for the record, to my friend from Wyoming, that the House bill did not go through the committee either. They brought it directly to the floor. It did not go through the Education Committee. It only went through the Rules Committee and then to the floor. So they did the same thing. They didn't go through their committee either. Again, I am hopeful we can work this out. But if we can't, I say to my friend, I hope we do have an up-or-down vote on both provisions.
There was one other thing I wished to mention before I leave the floor this afternoon and leave this debate on the student interest rate bill; that is, I heard time and time again from the other side about the fact that the President took $5 billion out of this and the fact that I said earlier: Yes, and that was the limit and that was all and he didn't want any more taken out of it. Someone said, but he has $4.5 billion in his budget to take out.
What happened, the President did put $4.5 billion in his budget to take out of the Prevention and Public Health Fund--which I hope comes as no surprise to anyone. Then, when the House and Senate earlier this year were engaged in negotiations on extending the unemployment compensation and also the payroll tax deduction, when we were engaged in that, they put that on the table. The President stuck with his $4.5 billion, the Congress added another $500 million, and they come up with a $5 million cut to the Prevention and Public Health Fund. The President said: That was in our budget. If you want to use it for that, use it for that but no more.
As I said, we have a statement of administration policy that says that if the elimination or any cuts to the Prevention and Public Health Fund are in here, he will veto the bill. I just wanted to make clear that the $5 billion and the $4.5 billion are one and the same. They are not $9.5 billion that he wanted to take out of the Prevention and Public Health Fund. I wanted to make that clear.
I see my friend from Florida is here, and I yield the floor.
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