Is Tax Reform Possible?

By at 5 September, 2013, 2:01 pm

by Karen Kerrigan-

Tax reform was highlighted in SBE Council’s “10 Small Business Issues to Watch in 2013 report, which was published when the 113th Congress convened in January.  Tax system reform remains one of SBE Council’s top priorities, and we will continue to leverage current federal efforts when Congress returns from summer recess on September 9.

Reforming the tax system would be a major boost to the U.S. economy, and for small businesses and entrepreneurs. The complexity of the U.S. tax system is especially onerous for small firms.  Compliance costs are a major burden for small businesses and startups. In fact these costs are 65 percent higher for small firms rather than for large, according to a Small Business Administration (SBA) Office of Advocacy study. The compliance price tag for small businesses owners is between $18-$19 billion annually.  National Taxpayer Advocate Nina Olson called these compliance burdens “unconscionable” in her 2013 report to Congress. SBE Council agrees!

Of course, just about everyone in Washington agrees that the tax code is too complex and costly. So is anyone doing anything about it?

In early 2013, House Ways and Means Chairman Dave Camp (R-MI) developed a bipartisan strategy with his Democrat counterpart and Ranking Member Sanders Levin (D-MI) to tackle tax system reform.  They have been hosting public forums, working groups and general outreach with the aim of developing a plan – and legislation – to put before the full Congress sometime this fall.  Chairman Camp is doing a great job leading this effort. In spite of all the naysayers, he is forging ahead.  This is what effective leaders do.

SBE Council met with the small business working group comprised of Members from both parties, provided feedback to the House Small Business Committee and have urged entrepreneurs to weigh in on this important effort.  The Small Business Working group published a “discussion draft” that hit upon a few areas for reform.  These include:

Permanent Expensing of Investments in Equipment and Property.  The draft proposes to make permanent section 179 expensing, allowing small businesses to deduct immediately investments in new equipment and property up to $250,000, with the deduction phased out for investments exceeding $800,000 (both amounts indexed for inflation).  Without legislation, these levels will revert to $25,000 and $200,000, respectively, in 2014, which would be a tax increase for small businesses.  The draft also makes permanent the current-law provisions allowing computer software and certain investments in real property to qualify for section 179 expensing.  This proposal is based on a provision of the bipartisan H.R. 886, introduced by Reps. Jim Gerlach (R-PA) and Ron Kind (D-WI). 

Of course, SBE Council has been telling members of Congress and various occupants of the White House for years that continuous tax changes, and last minute extensions of expiring or temporary provisions, only place burdens on – and perpetuate uncertainty for –small business owners.

Simplify and Expand Use of Cash Accounting for Small Businesses.  The small business working draft replaces “the current array of complicated tax-accounting rules that apply to small businesses and farms with a uniform rule under which all businesses with gross receipts of $10 million or less may use the cash method of accounting.” Other accounting rules would be simplified as well.  This proposal is based on the bipartisan H.R. 947, introduced by Reps. Aaron Schock (R-IL) and Mike Thompson (D-CA). 

Establish a Unified Deduction for Start-up and Organizational Expenses.  For new businesses, the working draft “combines three existing provisions for start-up and organizational expenses into a single provision applicable to all businesses.” The draft increases the threshold for start-up to $10,000 (from $5,000), with a phase-out beginning at $60,000 of such expenses (from $50,000) and expands the deduction to cover organizational expenses. Expenses above the new limit continue to be deductible over the 15-year period following the start of the business.  This proposal is based on a provision of H.R. 886, introduced by Reps. Jim Gerlach (R-PA) and Ron Kind (D-WI).

Ease Tax Compliance by Changing the Due Dates for Business Tax Returns.  To assist taxpayers and tax professionals in filing tax returns accurately and on time, the discussion draft makes changes to the current schedule for filing tax returns by the various types of small businesses.  You can see the proposed schedule changes here.

Certainly, the draft items outlined by the Small Business Working group are worthy and would make a difference for many small businesses. But SBE Council believes tax reform must go further. Specifically, cutting rates for all business taxpayers (large and small) and drastically reducing the code’s complexity, are key pieces that will help drive economic growth, investment and entrepreneurship. These are key features that will help make our tax system more competitive, and are changes that are long overdue.

Of course, SBE Council has aggressively weighed in with Congress over the years on the issue of taxes and tax reform – staff and members have testified countless times about the importance of reforming our nation’s tax system, and about specific proposals before Congress.  In fact, in reviewing our work on this issue over the years, I came across SBE Council’s “principles of a sound tax system” detailed in a handbook for Congress and the Kemp Commission back in 1995 when tax reform was a hot issue.  These principles include:

• Low Flat Tax Rate to Promote Economic Growth

• Simplicity

• Clarity & Neutrality

• Capital Friendly

• Inflation Must Be Factored

• Limited Bureaucracy and Intrusiveness

• Minimize Incentives for Tax Avoidance

• Revenue Neutral Reform is Possible

Indeed, these principles still hold applicable today.

So what are the chances of seeing a tax reform bill make it to President Obama’s desk?

Well, the Senate effort is less organized.  One effort to engage individual Senators is not being shared with the public (at least not yet), and reform seems to lack institutional enthusiasm in general. Senate Finance Committee Chairman Max Baucus, (D-MT) does not have the support of Majority Leader Harry Reid (D-NV), still he toured the country with Chairman Camp during August to hear from taxpayers and to build support for reform.

President Obama proposed a “grand bargain” in July, but his tax proposal only includes a cut in the corporate rate and leaves individual rates intact (according to Ernst and Young, 95% of small businesses pay taxes on individual returns.)  Political observers believe there is simply too much on Congress’ plate to get something big like tax reform accomplished.  Some in Congress (on both sides of the aisle) would rather not address tax reform at all because they don’t want to make the hard choices involved with a comprehensive effort (eliminating preferences, for example).

When Congress returns on September 9, SBE Council will continue to fight for a tax reform plan that is inclusive of the needs of entrepreneurs.  A sound proposal will advance fairness and simplicity for small businesses and start ups.  But even if comprehensive tax reform does not gel in this Congress (or with this President), SBE Council will advocate with the future in mind.  That is, small but meaningful reforms and tax relief steps that can be won now, will help build toward the next effort.

With the support of small business America and SBE Council members, we are confident we will move tax policy in the right direction in this Congress.

Karen Kerrigan, President & CEO

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