Small Businesses Brace for Tax Battle

Under Obama Plan, Some Entrepreneurs' Bills Would Soar

Gail Johnson doesn't think of herself as wealthy. The former pediatric nurse has spent 20 years building a chain of preschools and after-school programs that accommodate sick children so working parents can keep their jobs.

But, like most small-business owners, Johnson reports her profit on her personal tax return. In a typical year, she and her husband make more than $500,000, according to her accountant, a figure that throws them squarely into the ranks of the richest Americans -- and makes them a prime target for the Obama administration's tax policy.

Since last year's campaign, President Obama has vowed repeatedly not to increase taxes for families making less than $250,000 a year. That pledge, while politically popular, has left him with just two primary sources of funding for his ambitious social agenda: about 3 million high-earning families and the nation's businesses.

Johnson, with her company, falls into both categories. If Obama's tax plans are enacted, her accountant estimates that her federal tax bill -- typically, around $120,000 a year -- would rise by at least $23,000, a 19 percent increase.

"You hear 'tax the rich,' and you think, 'I don't make that much money,' " said Johnson, whose Rainbow Station programs are headquartered near Richmond. "But then you realize: 'Oh, if I put my business income with my wages, then, suddenly, I'm there.' "

Across the nation, many business owners are watching anxiously as the president undertakes expensive initiatives to overhaul health care and expand educational opportunities, while also reining in runaway budget deficits. Already, Obama has proposed an extra $1.3 trillion in taxes for business and high earners over the next decade. They include new limits on the ability of corporations to automatically defer U.S. taxes on income earned overseas, repeal of a form of inventory accounting that tends to reduce business taxes, and a mandate that investment partnerships pay the regular income tax rate instead of the lower capital gains rate.

'A Permanent Target'

Business groups say they're bracing for even more battles with the administration.

"They're desperate for revenue. And therein lies the concern of the broader business community," said R. Bruce Josten, chief lobbyist for the U.S. Chamber of Commerce.

"We're going to be a permanent target, and we understand that," added Catherine Schultz, vice president for tax policy at the National Foreign Trade Council. "The way they see it, corporations don't vote."

Obama has proposed some business tax breaks, but those proposals have been dwarfed by the tax increases under consideration, particularly his plan to let tax cuts enacted by former president George W. Bush expire for high earners.

Administration officials say they would simply restore rates in effect during the Clinton administration for every dollar of income over $250,000 ($200,000 for individuals). The plan is intended to counter years of rising inequality in which wealth has been concentrated at the top of the income scale.

From 1979 to 2006, after-tax incomes rose by $863,000 -- more than 250 percent -- for the top 1 percent of households, compared with $9,200 -- or 21 percent -- for middle-income households, according to a recent analysis of IRS data by the nonpartisan Congressional Budget Office. By allowing the Bush tax cuts to expire next year for upper-income taxpayers -- but keeping the cuts that benefit middle-income families -- Obama has said he hopes to "restore some balance to the tax code."