House Small Business Committee Chairman Sam Graves (R-MO) today held a full Committee hearing to examine upcoming new taxes on small businesses and their economic effect.
“Tax season reminds us that small businesses are disproportionately affected by tax compliance, therefore slowing growth and hiring,” said Chairman Sam Graves. “Today’s testimony supported the notion that higher tax rates and tax uncertainty can mean that small firms have less capital to create jobs and invest back in their companies.”
“As we count on small firms to lead our economic recovery, we must realize that they are bracing for new taxes and tax increases in the health care law, such as the increase in the Medicare payroll tax and an unprecedented Medicare tax on non-payroll income. And on top of that, they remain uncertain about whether the 2001 and 2003 tax relief will be extended. Coupled with other burdens, such as rising gas prices and inconsistent access to capital, this creates an ominous outlook for small firms. In order to help provide a better environment for small business job growth, Washington should end any threats of tax hikes.”
Small businesses are especially sensitive to expected tax policy because they must make important, long-term decisions today on investment, hiring, and expansion. One of the most significant threats is the expiration of the 2001 and 2003 tax cuts, which would be an enormous tax increase. According to an American Action Forum study, this would result in the loss of between 300,000 and 2.9 million jobs.
In addition, five of the 18 new tax hikes from the health care law will begin in 2013. The most economically damaging tax in the law may be the Medicare hospital insurance 3.8% surtax on wages and salaries over $250,000 and investment income over that amount.
A tax credit was included in the law to help small firms with the cost of covering their employees. The President’s Council of Economic Advisors estimated that over 4 million small businesses would use the credit, however, only 309,000 small businesses used it in 2010, and only about 360,000 in 2011, according to the Treasury Department. Studies found that the credit was too complex and its temporary nature didn’t provide real solutions to the crushing burden of the law.
For related hearing documents, click here.
Notable Witness Quotes:
Aparna Mathur, Ph.D. Resident Scholar at the American Enterprise Institute in Washington D.C., said, “The academic literature suggests that higher taxes and new taxes (such as those outlined in the Patient Protection and Affordable Care Act) not only affect the formation of new businesses, but also adversely impact the growth and survival of existing businesses. Moreover, uncertainty in policies relating to government spending and taxes further constrains business activity. This policy lesson is particularly relevant in the current economic climate when we have seen limited hiring and capital investments by not just small businesses, but also large businesses. Raising taxes on these businesses will negatively affect the weak economic recovery. To get the economy on the path to sustainable growth, we need to understand that raising taxes and health care costs on these businesses is the wrong policy prescription for these times.”
Martin J. Mitchell, Vice CEO of Mitchell & Best Homebuilders LLC, in Rockville, MD, said, “As the economy emerges from the Great Recession, NAHB strongly urges Congress to extend the 2001/2003 tax reductions. Small businesses organized as pass-thru entities pay individual income tax rates on their net business income. Thus, for small businesses, traditionally the nation’s foremost job creators, individual income tax rates are business tax rates.”
“Putting the federal government on a sustainable fiscal path is critical, especially for an interest-rate sensitive industry like home building that depends on debt finance for business and homebuyers. The federal government should strive to constrain the growth of government spending so that tax increases – particularly tax increases that disproportionately affect particular sectors of the economy – are not required”
Leonard Steinberg, Principal of Steinberg Enterprises, LLC of West Windsor, NJ, said, “Whenever money is taken out of the economy from the small business community, the consequences have multiple effects. Business owners cannot afford to give their employees timely raises, profit sharing and other fringe benefits are cut or withdrawn, business owners defer capital expenditures affecting their suppliers and the supplier workers, worker disposable income is reduced affecting vacations, restaurants, entertainment, and other activities. The workers who work in these industries also suffer due to the cutback. The Las Vegas economy is a prime example. Tax increases also disproportionately affect minority populations and their communities since small businesses usually operate in their own neighborhoods.”