Three Hurdles To Knowing Tax Reform

By Jan Meekcoms
Oregon NFIB
(Originally published in Salem Business Journal)

It’s an election year, which means it’s time to drag the old tax-reform issue out of the attic and blow the cobwebs off of it.

Just how important are tax issues to small business? In a survey of small businesses ranking 75 issues of concern for small businesses, federal and state tax issues occupy 5 of the top 10 items on the list. According to the April 2014 Small Business Economic Trends report, 21 percent of small business cited taxes as the single most important problem facing them today.

The Small Business Administration of Advocacy estimates it costs small businesses 206 percent more to comply with the tax code than it cots their larger counterparts. Small businesses spend on average $74 per hour on paperwork associated with tax compliance.

Gov. John Kitzhaber is not the only politician seeking re-election to make tax reform a plank in his platform, but he’s the most influential, and, as a result, will be held the most accountable for his seriousness about it.

For him and all the other candidates, here are the three hurdles of understanding one needs to leap in order to be keenly informed about tax reform as it relates to small businesses.

First Hurdle

Regular readers of this column have seen me cite this very important statistic before, and will again. According to the U.S. Small Business Administration’s Office of Advocacy, Oregon small businesses account for 98 percent of all employers and give jobs to 56 percent of the labor force. In short, tax reform needs to start on Main Street, not Wall Street, if you want to improve Oregon’s economy.

Second Hurdle

Lowering corporate tax rates falls short in helping most small businesses. Sorry, but the vast majority of small businesses, 75 percent, pay taxes at the individual rate.

To explain further, I’ll call on economist Kyle Pomerleau of the nonpartisan Tax Foundation.

“Today, there are vastly more non-corporate businesses than traditional corporations and they now earn more net income than traditional corporations. These businesses face top marginal tax rates higher than 50 percent in some states. Thus, ignoring the top individual tax rate—even while lowering the corporate rate—means the United States will continue to expose a broad swath of business to high tax burdens.

“To understand the impact of higher tax rates on business income, it is instructive to look at the tremendous growth in taxpayers reporting business income over the past three decades as sole proprietors, S corporations, limited liability corporations (LLCs), and partnerships.

“These non-corporate firm types are often referred to as ‘pass-through’ entities because the firm’s profits are passed directly through to the owners and taxed on the owner’s individual tax return. By contrast, the profits of traditional C corporations are taxed at the corporate level first before being distributed to the owners (shareholders) …

“As lawmakers consider policies to improve the competitiveness of American businesses, they should not forget that individual income tax rates are just as important to business activity as the corporate rate.”

Third Hurdle

Oregon legislators have been nasty, brutish and short to the small-business owners of our state. After grudgingly extending a small business tax reduction rate of 7 percent during the October 2013 special session, they tried swiping it back in this year’s short, 35-day session. It is sure to be under siege again in the longer 2015 session.

Candidates, now that you’ve leaped the three hurdles of understanding tax reform from a small business perspective, here’s some rhetoric you can play with.

• It’s Main Street, not Wall Street, that gives most Oregonians their jobs and the state most of the revenue it needs to operate.
• But small businesses are not smaller versions of big businesses; they have uniquely different difficulties in remaining solvent, including getting little advantage from cuts in corporate tax rates, because almost all of them pay taxes at the individual rate.
• If re-elected (or elected), I’ll be a friend of small business.

By the way, Governor Kitzhaber, since you’ve been meeting with the larger business associations in shaping your tax reform package, how about including the largest small business association? NFIB has 350,000 members nationwide and 7,500 small business members in Oregon. None are publicly traded corporations. Awaiting your call.

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Jan Meekcoms is Oregon state director for the National Federation of Independent Business.

[hyperlinks]
U.S. Small Business Administration Office of Advocacy
http://www.sba.gov/sites/default/files/or12.pdf

Pomerleau article
http://taxfoundation.org/article/individual-tax-rates-impact-business-activity-due-high-number-pass-throughs