Congress’s top tax writers have pledged to make small-business concerns a priority as they craft legislation to overhaul the nation’s tax code, though they remain tight-lipped on some of the specifics employers can expect in their proposals.
Senate Finance Committee Chairman Max Baucus (D-Mont.) and his counterpart, House Ways and Means Committee Chairman Dave Camp (R-Mich.), are traveling the country together right now to drum up support for comprehensive tax reform, and each plans to introduce a proposal sometime this fall.
Many of the specific changes have not been revealed, but in a series of recent joint opinion pieces, they wrote that helping small businesses would be one the “fundamental principles” guiding both of their efforts.
“Small businesses are the heart of most communities,” Camp and Baucus wrote in the Orange County Register. “We will work to ensure that any tax reform plan does as much to help a small family business create jobs and compete as it does for a large company.”
Small-business owners have for decades complained that current tax code requires them to spend too much time and money on compliance, placing them at a disadvantage to large corporations that have entire departments devoted to accounting. A recent poll by the U.S. Chamber of Commerce showed that 83 percent of small employers support a broad overhaul, and half said the top priority should be simplifying the rules.
Baucus and Camp have said that is precisely their aim. Camp, for example, has urged lawmakers to expand the use of a popular bookkeeping method known as “cash accounting,” which does not require companies to pay tax on income they have not yet received and generally presents fewer reporting hurdles. He also wants to establish one, simplified deduction for some of the organizational costs associated with starting a company.
“I had a man come in who had one retail store, and his tax preparation fee was $9,000,” Camp said at a recent event in Washington, adding that there has been broad support in Congress for scrubbing out some of the clutter in the current tax code.
On the other side of Capitol, Baucus is taking what he calls a “clean slate” approach to eliminating credits and deductions. His staff has asked lawmakers to submit proposals for tax breaks they think should be included in a completely new code, rather than trying to go though and weed out existing provisions.
Meaghan Smith, a spokesperson for the Senate Finance Committee, declined to comment on which loopholes and exemptions might be on the chopping block, but she said the chairman is taking a close look at the more than 30 definitions of “small business” that currently exist for various tax provisions.
“Some of these measures were well-intended, and people were trying to help small businesses, but the result has been a lot more confusion,” Smith said in an interview. “Getting rid of some of that underbrush would be helpful.”
Complexity is not the only source of tax frustration for small-business owners, though. Many have been critical of the current rate structure, which leaves some small firms paying a much higher rate than large companies.
Most small firms are set up as pass-through entities, meaning taxes are paid by their owners at the individual rate, which runs as high as 39 percent. By comparison, the corporate rate is 35 percent, and after deductions, corporations pay an actual average rate of about 12.6 percent, according to the Government Accountability Office.
Consequently, many small-business groups bemoaned a proposal last month by the Obama administration to lower the corporate rate without also lowering individual income rates.
“A corporate-only approach to tax reform will ensure that small business shoulders a much greater tax burden than mega-corporations,” Dan Danner, head of the National Federal of Independent Business, said of the proposal.
Camp and Baucus seem to agree, and while they applauded the president for acknowledging that the system is broken, both say they are committed to lowering rates for businesses of all sizes, including small pass-throughs.
One of the reasons Camp is pursuing a comprehensive deal in the first place is “because most small businesses pay taxes at the individual level,” said Sarah Swinehart, a Ways and Means Committee spokesperson.
During an interview, she pointed to a tax reform draft released by the chairman earlier this year, in which he proposed two options for eliminating discrepancies between pass-throughs and corporations — one that would revise the code to treat both entities more uniformly and another that would create a new classification system.
“Washington currently taxes [small firms] at top rates nearly 10 percentage points higher than their corporate counterparts,” Camp said in a statement after publishing the outline. “That’s simply unfair to small businesses,”
Swinehart said “there seems to be momentum for both individual and corporate reform in both the House and the Senate” — and not just from Republicans. Baucus, for example, has said during stops on the ongoing tax reform roadshow that a plan must address both rates in order to ease the burden on small businesses.
Determining whose rates to lower and which loopholes to cut are only the first steps, though, and some say the next logical step in the process, should the duo get there, will be much harder — that is, determining how to use all the money the government saves by eliminating those deductions.
Republican leaders want to apply those breaks solely to lowering tax rates, according to Bill Frenzel, a former ranking member on the House Budget Committee and former member of the Ways and Means Committee. On the other hand, Democrats want to spend some of that added revenue.
“That’s going to be the biggest hurdle,” Frenzel, a guest scholar at the Brookings Institution, said in an interview.
Senate Majority Leader Harry M. Reid (D-Nev.) recently said any tax reform bill would need “a significant revenue target,” and Sen. Charles E. Schumer said that target should be set at around $975 billion in added revenue.
Senate Minority Leader Mitch McConnell (R-Ky.) quickly slammed the door on that idea.
“I don’t see how we get anywhere, candidly,” Senate Minority Leader Mitch McConnell (R-Ky.) said in response. “The point of this ought to be to make our country more competitive, not to give the government more revenue.”
Right now, though, Camp and Baucus are not looking that far down the road. Instead, the focus is on pinpointing which deductions to scrap and introducing bills that will bring both sides to the table.
“The Senate bill that I come out with will probably have some revenue, and the House bill, at this point, probably will not,” Baucus said at the event in Washington. “So we will then meet, conference, and that’s the plan.”
“It’s not about figuring out how it’s not going to happen,” Camp added. “We’re sitting around trying to figure out how to make it happen.”