Amid pandemic recovery efforts, small businesses have become the latest target of Washington’s overtax and overregulate agenda. Sen. Ron Wyden, D-Ore. recently unveiled legislation that would partly erase a provision in the federal tax code that gives small businesses the opportunity to deduct up to 20% of taxable income. Why? To help pay for runaway spending.
Wyden argues the change targets millionaires and will not “rais(e) taxes on Main Street small businesses.” That’s an attractive talking point but flies in the face of reality.
Under the proposal, the tax deduction for pass-through businesses would begin to disappear for those making more than $400,000 per year. A pass-through business is simply a company that passes income along to the owner for tax purposes. It’s the simplest way to start a business, which is why the framework is so popular. Sole proprietorships, s-corporations, LLCs and partnerships are common examples. These are not synonymous with the “1%” as the left likes to claim.
In fact, the vast majority of small businesses are structured as pass-through entities. And while $400,000 is a lot of cash, small business owners aren’t simply sitting on a pile of money in their offices like Scrooge McDuck. Some of that money is funneled back into the business to upgrade facilities, create new job opportunities, and put the company on a stronger footing to succeed in the future. From this perspective, profits quickly stretch thin.
Despite Wyden’s carefully crafted rhetoric, the proposal ultimately amounts to nothing more than a tax hike on Main Street.
When adopted as part of the 2017 Tax Cuts and Jobs Act, the 20% tax deduction for pass-through companies unleashed an untapped wave of economic growth that extended from pizza parlors to manufacturers. Because it allowed some small businesses to shield up to one-fifth of qualified income from Uncle Sam, the policy was in essence a tax cut. It lowered the effective top tax rate from 37% to 29.6% — giving small business job creators the opportunity to reinvest more money back into operations.
As a small-business owner in Illinois, my company and the dozens of people we employ experienced the benefits firsthand. The savings created by the deduction allowed my business, HM Manufacturing, to provide employees with bonuses, wage increases, and 100% paid health care. We were also able to purchase new machines and hire even more people to operate them.
It’s a story that played out from California to New Jersey and produced the strongest economy in half a century. In Illinois, for example, the jobless rate hit the lowest level on record in 2019. Mimicking this cocktail of high employment, rising wages and stable prices should be the goal of any policymaker, regardless of political affiliation.
That’s why Wyden’s proposal is so puzzling. Unwinding the small business tax deduction now would sabotage a return to this economic boom.
According to the latest polling from the Job Creators Network Foundation’s Monthly Monitor, only 9% of small businesses have fully recovered from the economic impact of the pandemic. The threat of new business limitations from coronavirus variants, softening consumer demand resulting from rising prices, back rent owed from pandemic-era leasing leniency and worker shortages are among obstacles standing in their way. Hiking taxes will only exacerbate the situation and create an even more hostile environment.
The current thinking in Washington is not encouraging. Massive government spending is contributing to quickening inflation and now some politicians are looking to squeeze even more cash from taxpayers to pay the bill. Sen. Wyden’s effort to target small businesses is the latest and, perhaps, the worst idea yet.
Nicole Wolter is president and CEO of HM Manufacturing in Wauconda and a member of the Job Creators Network.