Author: Michael Hosemann, Managing Director, Enterprise Consulting Solutions

In the “brave new world” following the November 2008 elections, small businesses face a phalanx of challenges in the tax arena. First of all, the Obama Administration and Democrats in Congress plan to allow some of the Bush-era tax cuts to expire, thus raising taxes on top earners. Secondly, the health care overhaul being debated in Congress contains proposals that pose a huge financial threat to small businesses. Finally, the Cap and Trade legislation that awaits debate in Congress proposes an energy tax in disguise that promises to artificially explode the cost of energy and, therefore, the cost of overhead in small businesses.

1. Proposed Federal Tax Hikes.
   “Small businesses are particularly vulnerable to the proposed tax hikes because they typically pay taxes via ‘flow through’ entities, such as sole proprietorships, partnerships, LLCs, PLLCs and S-Corporations. These entities are taxed through the individual income tax system, with their revenues ‘flowing through’ to their owner’s individual tax returns. This allows small businesses to avoid the corporate income tax system, but can put self-employed small business owners in the top tax bracket. According to the U.S. Treasury, flow-through small businesses account for 93 percent of all businesses in the United States.” (Jones and Villarreal, 1).The 2003 Bush tax cuts expire in 2010, and Obama does not want to renew them. Thus, the two top rates will return to their pre 2001 levels:
   • The top marginal personal income tax rate will increase from 35 percent to 39.6 percent.
   • The second highest rate will increase from 33 percent to 36 percent.
2. Health Care Surtax. According to H.R. 3200:
   • Individuals with an Adjusted Gross Income (AGI) above $280,000 will pay a surtax of 1 percent. Those with incomes above $400,000 will pay a surtax of 1.5 percent.
   • Those above $1 million in AGI will pay a surtax of 5.4 percent.

   Furthermore, “under the health care reform bill proposed in the House, small businesses would face financial penalties if they don’t provide health insurance to their employees.” Employers will be required to offer qualifying coverage and pay at least 72.5 percent of each worker’s individual premiums and at least 65 percent of family premiums. Except for the smallest businesses, penalties will be imposed for noncompliance.

   • Businesses with annual payrolls of $250,000 to $300,000 would pay a penalty equal to 2 percent of their payroll if they do not provide qualifying employee insurance.
   • Businesses with payrolls larger than $300,000 will be penalized at 4 percent, 6 percent or 8 percent of payroll on a graduated scale. (Jones & Villarreal, 3)

   “The Tax Foundation estimates that the average-income business will report adjusted gross income of $948,414 in 2011. This business would face a total tax increase of $66,979, bringing their federal tax burden to more than $ 293,000.” (Jones & Villarreal, 3) These taxes will impose higher overhead costs on small businesses and put pressure on profit margins. Many small businesses cannot pass along increased costs to their customers. So, they will have less money for payroll, marketing or reinvestment. Instead of stimulating job creation, these regressive measures will actually spur higher unemployment.

3. The Impact of the Cap and Trade Bill. The Heritage Foundation recently performed an economic analysis of H.R. 2454, the American Clean Energy and Security Act of 2009. Cap and Trade raises the cost of energy high enough so that individuals and small businesses are forced to use less of it. This economic pain will be shifted from utilities to small businesses, individuals, automobile owners and farmers.
   (Lieberman, 1)“The Heritage Foundation notes that electricity costs will go up 90 percent by 2035, gasoline by 58 percent and natural gas by 55 percent by 2035. The cumulative higher energy costs for a family of four by then will be nearly $ 20,000.” (Lieberman, 2)“Beyond the cost impact on individuals and households, Cap & Trade also affects employment and especially employment in the manufacturing sector. We estimate job losses averaging 1,145,000 at any given time from 2012 to 2035. These are net job losses, after the much-hyped green jobs are taken into account. Some of the lost jobs will be destroyed entirely while others will be outsourced to nations like China and India that have repeatedly stated that they’ll never hamper their own economic growth with energy-cost boosting global warming measures like Cap & Trade.” (Lieberman, 2)
4. What Can Small Businesses Do About This?
   If ever there was a time for aggressive political action by small businesses and small business bankers, that time is now. For a list of Congressional contact information please see the following Web sites:To write or call a Representative, click here and choose the state: http://www.house.gov/house/MemberWWW_by_State.shtmlTo write or call a Senator, click here and choose the state: http://senate.gov/general/contact_information/senators_cfm.cfm

Works Cited:

1. Jones, Biff and Villarreal, Pamela; Soaking the Rich and Drenching Small Business-Brief Analysis, August 6, 2009, National Center for Policy Analysis, Dallas, TX. www.ncpa.org
2. Lieberman, Ben; The Economic Impact of the Waxman-Markey Cap and Trade Bill, June 26, 2009, The Heritage Foundation, Washington, D.C. www.heritage.org