PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Christmas Coal: “Tax Fairness” Bill Advanced by House Ways and Means is a Big Tax Hike on Small Businesses

By at 13 December, 2019, 11:28 am

ICYMI NEWS

For Immediate Release

Washington, D.C. – On December 11, and by a 24-17 vote, the House Ways and Means Committee reported out the “Restoring Tax Fairness for States and Localities Act,” H.R. 5377. The legislation temporarily brings back the state and local tax deduction (SALT) for some, but raises taxes on businesses in all 50 states. Small Business & Entrepreneurship Council (SBE Council) president & CEO Karen Kerrigan said the bill punishes productive entrepreneurs and small businesses, and bails out high-tax states that need to be lowering taxes in order to make them more competitive and attractive for business. In addition, SALT is not an issue in some states while others are adopting SALT parity legislation in response to changes in the Tax Cuts and Jobs Act (TCJA).

“This tax bill is very damaging to the productive small businesses that are driving economic growth and creating quality jobs. The Tax Cuts and Jobs Act is a significant reason why small business optimism continues to run high. Yes, there are fixes that need to be made to strengthen the Act and bring greater parity to small businesses – such as making the individual rate provisions permanent – but the Democrat bill to ‘restore’ the SALT deduction will create distortions and take away critical resources from pass-through businesses across the nation,” said Kerrigan.

H.R. 5377 increases the top individual rate from the current 37 percent to 39.6 percent, while lowering the income threshold of the top rate from $622,050 to $496,600 (Joint) from 2020 through 2025. Under current law, the 37 percent rate expires in 2025.

According to an S-Corp Association Washington Wire blog post:

“The relationship between the new SALT deduction cap and the pass-through business community is complicated. The SALT cap only applies in states with income taxes, and then only if the businesses taxes are paid at the shareholder level. So for S corporations residing in Texas (no income tax) or Wisconsin (where they adopted our SALT Parity legislation), SALT isn’t an issue and this legislation is just a tax hike. On the other hand, SALT is likely the reason so many California S corporations have converted to C corporation. The business community letter [raising concerns about H.R. 5377] reflects this challenge, noting:

While this SALT relief will benefit some pass-through businesses, those savings will be reserved only for businesses residing in certain states, while the tax hike will apply to businesses in all fifty states.

One suspects the SALT issue is complicated for the bill’s proponents too. The SALT benefit is primarily enjoyed by the same upper-income taxpayers who will be subject to the higher top rate. As Richard Rubin at the Wall Street Journal tweeted yesterday:

‘You can think of this as cutting taxes for some of the top 1% (and others below that) and paying for it by raising taxes on the top 1%. On balance, at first blush, it would be good for NJ/NY/CA rich/upper-middle-class people, not so much for TX/FL/WA rich people.’

Amid all this complexity, one point of clarity is that C corporations can continue to fully deduct their SALT while S corporations cannot. For that reason, S-Corp will continue to press for its SALT Parity legislation at the state level. Connecticut, Wisconsin, Oklahoma, Rhode Island, and Louisiana have already acted and restored the SALT deduction for their S corporations and partnerships, while several additional states are teed up to act early next year. The more quickly they act, the more quickly SALT ceases to be an issue for the pass-through community.”

Kerrigan said the bill is all about politics and not good policy: “If enacted, the bill would not only increase taxes on many small businesses it would create a complicated mess. It’s not about ‘fairness’ at all.”

A recent study by EY found that pass-through businesses pay 51 percent of all business income taxes. They also employ 58 percent of the private sector workforce. According to Kerrigan, H.R. 5377 takes direct aim at these productive businesses that are driving economic growth and quality job opportunities.

As noted by Ways and Means Committee Ranking Member Kevin Brady (R-TX) in his remarks at the markup on December 11:

“According to the liberal Tax Policy Center, only 1 percent of taxpayers in America paid more taxes last year due to the reasonable SALT cap. In California, only 2 percent; New York, a mere 3 percent.

“The rest of taxpayers either received a tax cut or broke even.

“That’s because the Republican Tax Cuts and Jobs Act lowered taxes on income across the board, doubled the child tax deduction and expanded it to more families, doubled the standard deduction so more working families kept more of what they earned, and eliminated the Alternative Minimum Tax for households making less than a million dollars. That was important because more and more families found the AMT canceled out their charitable and SALT deductions completely.

“Another myth that’s been debunked is that tax reform hurt state budgets. Just the opposite.”

With regard to the committee vote count (24-17) on H.R. 5377, one Democrat voted against it, Rep Stephanie Murphy (D-Fla.)., and one Republican voted for it, Rep. Tom Reed (R-NY). The full House may vote on the legislation next week.

Contact: 

Karen Kerrigan, SBE Council president & CEO

e-mail: kkerrigan@sbecouncil.org

SBE Council is nonpartisan advocacy, research and education organization dedicated to protecting small business and promoting entrepreneurship. For 25 years, SBE Council has worked on and advanced a range of private sector and public policy initiatives to strengthen the ecosystem for strong startup activity and small business growth. Visit www.sbecouncil.org for additional information. Twitter: @SBECouncil

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