Small businesses are the lifeblood of the American economy, accounting for two-thirds of net job growth in the U.S. and 44% of all economic activity. Small businesses were also devasted by the COVID-19 pandemic. Recent data from MIT suggests that small business revenue declined by 40% during the height of the pandemic. Some 200,000 small firms and businesses were force to shutter their doors permanently.
At a time when most Americans are helping their local businesses, Democrats in Washington are actually proposing huge tax increases on mom-and-pop job creators. Small businesses need a lifeline, instead, Democrats will anchor entrepreneurs with tax hikes to fund an unnecessary, $5 trillion spending spree.
Limitation on Business Income Deduction: When Congress passed tax reform in 2017, the bill created a 20% tax deduction for businesses that pay their taxes through the personal tax structure as opposed to the corporate tax code. This deduction, known as 199A, helped ensure that these “pass-through” firms enjoyed the benefits of tax reform and could reinvest in hiring. Unfortunately, the pending tax increases would gut the 20% tax cut by capping the maximum allowable deduction for the pass-through deduction. (Sec. 138201)
Capping the 20% tax deduction for pass-through companies is a direct tax increase on millions of small, family-owned firms and would increase taxes by $78 billion. According to Census data, 77.7% of small businesses in the U.S. are organized as pass-through entities. Of the 26.5 million self-employed individuals who don’t have other employees, 98.5% were organized as pass-throughs and could be subject to this tax hike.
Corporate Tax Rate Increase: One of the marquee elements of the tax bill is the return of a graduated corporate income tax with a proposed top rate of 26.5%. More than 1.3 million small businesses – employing nearly 12.5 million – are organized as C-corps. (Sec. 138101)
Individual Income Tax Rate Increase: The legislation promises higher taxes on individual filers, both increasing the top marginal tax rate to 39.6% as well as lowering the income threshold to apply the top rate. Though framed as a tax increase on high income individuals, the hike would also apply to pass-through businesses where profits are taxed at the owners’ personal tax rate. (Sec. 138201)
Net Investment Income Tax Expansion: Under the Democrat tax bill, the current 3.8% net investment income tax (NIIT) would be expanded to cover business income for “high income individuals,” which would inevitably impact pass-through businesses. Currently, the tax only hits investment income. (Sec. 138203)
Surcharge on Individuals, Estates, and Trusts: The bill would impose a tax equal to 3% of the adjusted gross income in excess of $5 million, which would also impact successful pass-through businesses. (Sec. 138206)
Capital Gains Tax Increase: Increasing the capital gains tax from 20% to 25%, the tax bill would discourage small business investment and entrepreneurism. (Sec. 138202)
Tobacco and Vape Tax Increase: The legislation proposes doubling the tobacco excise tax and applying it to vape products. Aside from the impact on tobacco consumers, the tax increase would also by design drive down sales and directly impact the bottom line of community small businesses like convenience stores, vape shops, and gas stations, a great number of which are immigrant-owned. (Sec. 138504)