Sen. Marco Rubio's claim on student loan bill is false

He says a Democratic plan would raise taxes on small businesses, but he's off base.
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Everyone seems to agree they don't want student loan interest rates going up this summer. President Barack Obama, Republican presidential candidate Mitt Romney, and Republicans and Democrats in Congress all say the government should take action to keep rates where they are.

Yet for all that agreement, it has still become a political fight. That's because keeping interest rates low for student loans means increasing the deficit. Both parties in Congress say they want to find a way to offset that; they disagree on how.

Republicans in the Senate voted down a bill from Democrats last week. In explaining his "no" vote, U.S. Sen. Marco Rubio, R-Miami, said the Democratic bill would raise taxes on small businesses.

"As someone with a student loan and with a state with so many people with student loans, I support a hundred percent making sure that the interest rates on student loans do not go up," Rubio said.

"I cannot support the way the Democrats want to do it, however, because they want to do it by raising taxes on small businesses, very small businesses. The kinds of small businesses that give jobs to graduates who not only need low interest rates but need jobs in order to pay their student loans."

We decided to check out Rubio's claim that the Democrats' plan raised taxes on small businesses. We read the text of the legislation the Democrats proposed, examined a summary of the bill provided by the nonpartisan Congressional Research Service, and ran the proposal by the experts at the Tax Policy Center, a respected independent think tank that focuses on taxes.

The Democratic proposal seeks to raise more tax revenues by changing rules on S-corporations. This is pretty arcane tax law, but what we found was very different from Rubio's description.

Here's the scenario: Small S-corporations are sometimes owned by the same people who do most of the work — think of small law firms, accounting firms and the like. As employees, their earnings are subject to payroll taxes, which go to pay for Social Security and Medicare. But as owners, their profits are not subject to payroll taxes. So employee-owners decide to avoid the payroll taxes by giving themselves low pay and high dividends.

"It is only when the owner and the employee are the same person, so that the wages come from the same person's profit, that there is a problem," said Eric Toder of the Tax Policy Center. "Typically this will happen only if there are a very small number of owners who also do the work."

The Democratic bill said that all income of partners of those types of S-corporations would now be subject to payroll taxes, and it takes steps to make sure that only those types of people would be targeted.

For one, the bill applies only on S-corporations where the owners are doing the work, and only on professional services firms in the fields of "health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services."

The bill also stipulates that the new rule wouldn't apply to individuals making less than $200,000 or couples making less than $250,000.

In defending the bill, Sen. Harry Reid, D-Nev., said it was aimed at people who are avoiding taxes.

"These are people who are usually accountants and lawyers who try to pay themselves through dividends and not ordinary income," Reid said. "It's wrong, it's not a tax increase, they're just being called upon to pay what they should pay."

We contacted Rubio's office. His staff referred us to a U.S. Treasury Report analysis that found that some individuals report small business income in excess of $200,000. The Treasury report found that approximately 8 to 11 percent of all small businesses report income at that level or above.

That report, though, counted small businesses as individuals who reported income from a sole proprietorship, partnership, farming operation, miscellaneous rental activity or S-corporation. The Democratic bill only targeted a subset of S-corporations.

Rubio's statement gives the impression that all kinds of mom-and-pop operations might be subject to new, additional taxes, when actually the bill is aimed squarely at high-income professionals. The bill's intent was to close a loophole on people who were avoiding payroll taxes, taxes that they're supposed to be paying anyway.

We rate Rubio's statement False.

This report has been edited for print. To read the full version and more rulings, go to politifact.com/florida

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