November 29, 2017
By Frank Knapp
Linda McMahon, administrator of the Small Business Administration, knows what small businesses need more than anything — “more buying customers through the door.” That’s what she told J.J. Ramberg recently on MSNBC’s “Your Business.”
Consumer demand is always the top concern in every small business poll — ahead of simplifying the tax code and parity with corporations. So with Congress moving full speed ahead with tax reform, our leaders in Washington have the chance to address two small business issues with one bill.
Unfortunately, the House and Senate bills neither increase consumer demand that will boost local small business economies nor make the tax code simpler for small businesses and treat them the same as corporations.
In 2000, my organization led the charge for tax parity in South Carolina. After five years and several legislative battles, we reduced our state tax on small business pass-through income to the same 5 percent that corporations paid. There was no income or type of small business qualifications, so simplicity was maintained.
Compare that tax reform to what is being offered in Congress. The nation’s big businesses, including multinational corporations, would have their tax rate cut immediately and permanently from a maximum 35 percent to 20 percent in both the House and Senate proposals. That is a 43 percent tax cut that’s very simple to calculate.
Small business pass-through entities would not see tax parity with corporations nor tax code simplification under current proposals.
The House plan sets the tax rate for pass-through income at 25 percent. However, 85 percent of small business owners already pay that rate and “service companies” like lawyers, consultants and accountants are excluded. Then by 2022, tax rates on the first $75,000 of pass-through income is reduced by 3 percent for a single filer, but this goes away when the small business owner starts making too much money.
The proposed Senate tax reform bill is just as confusing and unfair to small businesses. The bill excludes 17.4 percent of pass-through income for taxation. But the actual excluded income is based on the total wages paid by the business. The more wages paid, the closer the small business owner gets to the 17.4 percent income excluded from taxes. To top it off, all income tax cuts for small businesses expire in 2025.
Clearly, simplification is not a characteristic of the Senate plan for small businesses. And while one can’t easily compare tax cuts between corporations and pass-through businesses, small businesses are not getting anywhere near the 43 percent tax cuts corporations would receive. Plus, small businesses would no longer be able to deduct state and local taxes, but corporations would.
Adding to these issues, the proposals do nothing to increase consumer demand — an issue that keeps every small business owner up at night.
The House bill allows 92 percent of Americans to pay a little less or the same in taxes, according to the Joint Committee on Taxation. But by 2023 only 40 percent of Americans would pay less, 22 percent would pay more, and 38 percent would see little change. The Tax Policy Center estimates that by 2027 half of all the tax cuts in the House bill will go to the top 1 percent of Americans.
Most taxpayers fare even worse with the Senate bill. By 2027, the Tax Policy Center says that 50 percent of Americans will pay more in taxes, including most households with $55,000 to $93,000 in income. Yet the top 1 percent does even better than in the House version. By 2027, they will receive 62 percent of all the tax cuts.
Sadly, the ultra-wealthy are the only segment of the public that will get a sizeable and permanent tax break — and they don’t shop on Main Street. As conservative Georgia Rep. David Scott says, “Giving these tax cuts to the wealthy, they hoard it.”
Congressional efforts to quickly pass tax reform are clearly not in the best interest of small businesses. It is time Washington step back from doing the bidding of large corporations and focus on the needs of small businesses, which create the vast majority of our country’s jobs.
Tax reform that simplifies the tax code and helps level the playing field for small businesses, while growing our economy by putting more money in the hands of the Main Street consumer, should be the goal. It’s time Congress scrap the current proposals and start over by writing tax reform in a bipartisan manner that allows input from all parties and restores regular order for developing legislation.
Frank Knapp is the co-chair of Businesses for Responsible Tax Reform and president and CEO of the South Carolina Small Business Chamber of Commerce.