In tax fight, ‘small business’ is a term with many meanings

The Washington Post’s Ed O’Keefe explains the tax breaks and deductions that are fueling debate over how to raise revenue and reduce the deficit. (The Washington Post)
December 22, 2012

Small businesses, like the family-owned diner and the Main Street hardware store, are iconic images of America’s entrepreneurial spirit. Now, as President Obama and lawmakers seek to negotiate a deal on taxes and federal spending to avert a year-end budget crisis, both political parties and a range of outside advocates are claiming they best represent the interests of small business.

But politicians and interest groups have twisted the definition of “small business” as they seek an advantage in the debate over whose taxes to raise. Those who claim to speak for small business often represent only a narrow slice of that broad sector, if they represent it at all. And groups that are truly composed of small firms often are allied with advocates on the political right or left whose interests bear little resemblance to those of mom-and-pop stores.

At the heart of the debate is whether tax rates should increase for top-end taxpayers, as Obama has long urged. Most small businesses pay taxes according to individual rates, not corporate rates, so some firms would see their taxes increase if upper-end rates are raised.

“Raising tax rates will hurt small businesses at a time when we’re expecting small businesses to be the engine of job creation in America,” House Speaker John A. Boehner (R-Ohio) said at a Capitol Hill news conference last week. Boehner, who has resisted Obama’s demand for higher taxes on the wealthy, warned that increasing the rates on income over $250,000 would mean higher taxes on business owners representing more than half the country’s small-business income.

But the figure he cites comes from a report by Congress’s Joint Committee on Taxation, which counts many businesses that aren’t actually that small, including big law firms, large companies, hedge funds and private equity firms.

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That’s because small businesses aren’t the only firms subject to individual rather than corporate tax rates. Some large and publicly held firms — partnerships, “S” corporations and other “pass-through” entities that collect and distribute income and losses to their owners — also pay taxes at individual rates and would benefit if the top-end tax rates remain low.

Examples are the private equity firms Carlyle Group and KKR, the giant accounting firm PricewaterhouseCoopers and newspaper publisher Tribune Corp.

Obama has countered that small businesses would be better off under his plan to extend lower tax rates for the middle class while allowing rates to rise on income over $250,000 a year.

“I sat down with some small business owners who stressed this point,” Obama said at the White House late last month. If Congress adopted his plan, he said, “families and small businesses would, therefore, be able to enjoy some peace of mind heading into Christmas and heading into the New Year.”

The president has repeatedly said that 97 percent of all small businesses wouldn’t see their income taxes go up at all under his plan. But that figure, which comes from the same report by the Joint Committee on Taxation, relies on one of the broadest possible definitions of a “business,” including workers who are paid as consultants or make small amounts of money from a hobby.

A separate study by the Treasury Department uses a narrower definition of small business — outfits that record no more than $10 million a year in profits and deductions — and reaches a conclusion between the Boehner and Obama extremes. That study found that raising tax rates for the top two income brackets, as Obama has urged, would affect 10 percent of small businesses owners that have employees. These represent 38 percent of income for such small businesses.

The main trade group representing small business, the National Federation of Independent Business, has been one of the strongest opponents of higher taxes on the rich.

“In the small-business sector it’s still not boom times,” said Dan Danner, chief executive of the NFIB. “We generally don’t think recession or close to recession is a good time to be raising taxes on anyone.”

The NFIB is by far the largest trade group for small business. But with only 350,000 members, it accounts for only a very small fraction of such firms, which number at least 4 million and perhaps many more, depending on what’s defined as a small business.

The NFIB has aligned itself tightly with the Republican Party and the conservative movement. The group spent $4.7 million helping Republican candidates in the past election cycle, more than 99 percent of its political spending, according to the nonpartisan Center for Responsive Politics. In 2010, the NFIB accepted $3.7 million from one of the largest conservative interest groups, Crossroads GPS, which was co-founded by Karl Rove, a senior adviser to President George W. Bush.

By contrast, the National Small Business Association, with about 65,000 members, steers clear of political activity. Instead of focusing its concern on Obama’s goal of higher top-end rates, the association is pushing lawmakers to reform the tax code and make it simpler. “When we do our surveys of the small business community, they don’t want to pay more taxes, but an even higher rank for them is the complexity and burden of filling their taxes,” said Todd McCracken, president of the association.

Another of Obama's most vocal critics on higher tax rates is the Tax Relief Coalition. The group, which includes more than 1,000 companies and trade associations, is warning that small businesses would be harmed if top-end tax breaks are not extended.

“Small businesses are already burdened with high taxes, which will go even higher with the effect of Obamacare,” said Dirk Van Dongen, co-chairman of the coalition.

While small businesses are represented in the coalition, so are big partnerships and other pass-through companies that pay taxes according to individual rates.

Van Dongen is president of the National Association of Wholesaler-Distributors, and that group provides staff for the Tax Relief Coalition. More than 60 percent of the distributors represented by the association file taxes through the individual tax code. These include traditional small businesses, but also giants such as Houston-based Silver Eagle, the largest Anheuser-Busch beer distributor in the country with 1,200 employees and $820 million in sales in 2010.

As the battle over tax rates has escalated, the White House has been able to highlight small businesses that back its approach on individual tax rates.

The business groups cheering Obama’s proposals have far fewer members than their conservative foes and get some funding from liberal foundations and individuals.

For example, the Main Street Alliance, which uses the slogan “Small business owners. Small business values,” is an offshoot of the Alliance for a Just Society, a foundation that describes its mission as addressing “economic, racial and social inequality” and “strengthening community organizations.”

Another business group allied with the White House, the American Sustainable Business Council, only recently began operations as an independent entity. It was formed in 2009 with funding from the nonprofit Environmental Health Fund. The council’s chief executive and co-founder, David Levine, said it was set up in part to represent “a significant group of businesses” who have a different sense of the “bottom line,” meaning that their chief executives believe you can achieve strong profits “while providing social and environmental benefits.”

Along with other small business owners, four members of the group met with Obama at the White House last month. They included the owners of a used-record store in St. Louis and an Oakland “urban mushroom farm.”

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