Proposed tax hikes would damage fragile economy

A man in a bicycle repair shop uses a laptop computer to run his business. (Photo: Mintimages, via Shutterstock)

It’s like pulling a life raft away from a struggling swimmer. 

Congress wouldn’t look at what it’s doing to small businesses that way, but that is what it will do if it carries through on some harmful proposals being considered.

This is the same Congress that last year nobly and effectively rose to the challenge and met the pandemic-ruined economy head on with such business-saving initiatives as the Paycheck Protection Program (PPP).

In its latest survey of its small-business-owning membership, the National Federation of Independent Business (NFIB), which I serve as its California state director, found 77% had applied and received a PPP loan and 43% had applied and received a second loan. The forgiving of repayment of those loans was another positive thing Congress did.

Raising the income tax rate on businesses from 37% to 39.6% and boosting the capital gains tax rate to 43.4% are two other bad ideas.

Why, then, would it want to handicap what it did so much to bring back to health? Five proposals in particular would undo so much of what was done right.

The first would be a reduction or elimination of the Small Business Deduction in the federal tax code. This bad idea hits home with NFIB more than any other, because the 20% deduction off taxable income for businesses organized as sole proprietorships, partnerships, LLCs, and S-Corporations included in the 2017 Tax Cuts and Jobs Act (TCJA) was one of the biggest benefits for small businesses.

It should always be remembered that prior to the COVID-19 pandemic, the nation was experiencing one of the hottest economies in its history with small business optimism hovering around record highs, and the TCJA – containing that Small Business Deduction – was the biggest reason for it.

Another inexplicably punitive proposal calls for repealing the stepped-up basis for determining the value of property and taxing it at death. This tax treatment is significantly important to the ability of future generations to carry on the enterprises their parents worked a lifetime to build, and, ipso facto, keep employment opportunities alive for that majority of people.

Raising the income tax rate on individually- and family-owned businesses from 37% to 39.6% and boosting the capital gains tax rate to 43.4% are two other bad ideas that make for head-scratching wonderment.

And then there is the idea to increase the corporate tax rate from 21% to between 25% to 28%. But not all establishments organized for tax purposes as C Corporations are the behemoth industries that come to most people’s minds. There are roughly 1,000,000 Main Street businesses classified as a “small” C corporations that would feel the effects of a corporate tax increase. 

These companies, such as a local, independent pizzeria, earn less than $400,000 in business receipts, falling under the threshold that President Biden promised to protect from tax increases, and include many small businesses that local economies throughout our state depend on. Raising their financial obligation to the government will make it harder for them to hire workers, increase wages, grow, and give back to their communities. 

So, corporate tax rates are a small-business issue as well. Raising the financial obligation to the government on those small businesses organized as such, as with others organized differently, makes it harder to hire workers, increase wages, and give back to their communities—at a time in our nation’s history when we need all to happen at warp speed.

NFIB has launched a Small Business Survival awareness campaign that has more information on the above and on other deleterious proposals.

Editor’s Note:
John Kabateck is California state director for the National Federation of Independent Business.

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