This week, Senator Joe Manchin (D-WV) signaled his resistance to President Joe Biden’s plan to raise the corporate tax rate from 21 percent to 28 percent to fund infrastructure investments — and his intransigence could protect numerous private equity donors who bankrolled his 2018 reelection campaign.
Further review of Manchin’s campaign contributions reveals his stance on tax reform could also protect lucrative tax benefits obtained by many of his biggest campaign benefactors in the legal industry as part of President Donald Trump’s 2017 tax law. That legislation included a special tax cut for certain types of incorporated law firms.
Unlike Manchin’s private equity donors, which include familiar names like Ares Management, the attorneys and lawyers who have filled the senator’s campaign war chest mostly belong to the inscrutable name-soup of billboard regional law firms unknown to most voters, such as the West Virginia firm of Bailey, Javins & Carter, whose lawyers donated $6,400 to Manchin’s 2018 reelection campaign.
But those donations have added up. Since 2015, Manchin has received nearly eight hundred contributions averaging slightly less than $1,000 from lawyers in thirty-one states, according to data available through the Federal Elections Commission.
In total, lawyers and law firms represent the second largest source of donations to Manchin’s campaign committee and leadership PAC after securities and investment businesses, totaling more than $822,000 in contributions since 2015, according to data compiled by OpenSecrets.
Donors from Manchin’s largest individual source of law firm cash, Steptoe & Johnson, delivered $23,100 to his 2018 reelection campaign, and the American Association for Justice PAC, which advocates for trial lawyers and opposes tort reform, contributed $10,000.
And all of these lawyers have a major stake in what happens with Biden’s new tax plan.
A Tax Gift From Trump
The Trump tax cuts provided a financial windfall for lawyers. Prior to 2017, many law firms were taxed at a flat rate of 35 percent as “personal service corporations,” a common incorporation setup for smaller practices. In addition to providing significant reductions in marginal tax rates for individual filers, the GOP tax law eliminated the flat rate for professional service corporations, allowing those firms to be taxed at the new and reduced corporate tax rate of 21 percent.
For law firms organized as personal service corporations, the Trump tax cuts have been lucrative. Changes to the tax code lowered the corporate tax rate paid by firms below the individual tax rate paid by the partners. The shift was convenient, because the revised tax code allowed members of a law firm various opportunities to shield income that would otherwise be taxed at a higher rate. They could now deduct fringe benefits and bonuses as expenses, and any cash not paid out in salaries could remain in the corporation to be reinvested however the firm decides.
In 2017, as Congress debated tax legislation, top lobbyists for the legal industry threw more money behind Republicans, and the industry as a whole spent more than $16 million on lobbying that year, the most since 2011.
When it comes to tax reform, the fates of law firms and their corporate clients are intertwined, as changes to the tax code advocated by corporations and their lobbyists at corporate law firms benefit everyone involved. The lower corporate tax rates instituted by the GOP tax law provided a windfall to both big businesses and incorporated law firms.
At the same time, the new law’s lower marginal tax rates benefited partners at law firms organized as limited liability partnerships (LLPs) the same way they helped wealthy executives. That’s because both LLPs and LLCs operate as pass-through entities, which means that each member’s salary and bonuses are separated from the business and taxed as personal income.
Biden’s new tax proposal would undo the Republican tax breaks — at least partially. The plan would raise the corporate rate to 28 percent, but it appears the other fringe benefits enabled by the GOP’s tax code would remain in place. Compared to Obama-era rates, many firms would still enjoy a significant tax break, and for lawyers earning more than $163,000, the corporate tax rate will remain much lower than the marginal tax rate.
But even this limited attempt to undo the Trump tax breaks could fail if Manchin succeeds in his opposition — a development that would benefit the lawyers and law firms that have bankrolled his campaign.
Dems’ Growing Ties to the Legal Industry
Manchin has signaled that he’s not alone in his disapproval of the new tax plan, indicating that there are potentially “six or seven” other Democrats who have so far privately objected to Biden’s proposal. And he is far from the only Democrat to have his campaign coffers filled by lawyers.
The legal services industry has become one of the top contributors to Democratic lawmakers and candidates, especially in 2020, as lawyers abandoned the Republican Party. President Biden received more than $57 million from the industry in 2020. Thirteen Senate Democrats, including former presidential candidates Elizabeth Warren and Bernie Sanders, each received more than $1 million that same year, and the top twenty recipients of law firm cash in the House are currently all Democrats.
That group includes Rep. Josh Gottheimer (D-NJ), a conservative Democrat who has sided with Manchin in opposition to Biden’s tax overhaul, telling Axios, “We need to be careful not to do anything that’s too big or too much in the middle of a pandemic and an economic crisis.”
Since being elected to Congress in 2017, Gottheimer has received more than $1.5 million in contributions from lawyers and law firms, more than almost any other member of the House.
When Biden was asked Wednesday about his plan to raise the corporate tax rate to 28 percent, he said Congress must figure out how to fund his infrastructure plan, but he also said he is “willing to negotiate.”
Democrats’ reliance on campaign cash from the legal services industry underscores a larger problem facing the Left on tax reform: How far can they raise taxes to fund progressive priorities when many of their largest donors did so well thanks to Trump’s tax cuts?