September 6, 2012
Two GOP lawmakers are angry with Treasury Department officials for a year-old study that offers a narrower definition of “small businesses” than the one often used by Republicans to argue against tax increases on upper-income individuals.
In a letter sent Thursday to Treasury Secretary Timothy F. Geithner, House Small Business Chairman Sam Graves, R-Mo., and Senate Small Business and Entrepreneurship ranking Republican Olympia J. Snowe of Maine criticize a report written by Treasury officials that was published in August 2011.
That report, one of a series of technical papers by Treasury’s Office of Tax Analysis, concluded that roughly 32 percent of small business income would be affected by President Obama’s proposal to raise taxes on household income above $200,000 for single filers and $250,000 for couples. According to the definition used by Treasury officials, businesses that earn more than $10 million or take deductions worth more than $10 million would not be considered small businesses.
By comparison, a definition that counts all business income assigned to individual owners for tax purposes would mean that more than 50 percent of small-business income would be subject to higher taxes under the administration plan.
In their letter to Geithner, Graves and Snowe argue that the Treasury paper runs contrary to the spirit of a 1953 law that established the Small Business Administration and gave the agency primary authority to define small business as the agency implements programs to assist smaller companies.
“Since 1953, the Small Business Act has provided the federal government’s definitions of small businesses,” Graves and Snowe write.
In fact, the SBA defines small businesses in a myriad of ways, assigning different rules for companies in different industries. Congress has also come up with still more ways of defining small businesses when designing various tax incentives.
When talking about small businesses, most Republicans, including Graves, often refer to all “pass-through” businesses such as partnerships and S corporations — companies whose shareholders report income or losses through individual tax returns.
The Office of Tax Analysis also have used this broad definition. According to its authors, the 2011 Treasury report was an attempt to come up with a more refined definition that could provide common terms for legislative and political discussions. As with all technical papers, the August 2011 report did not necessarily reflect the view of the Treasury Department, and it does not require formal changes in policies or programs.
In addition to setting an upper earnings limit for small businesses, the Treasury officials also set a bottom limit of $10,000 in earnings and $5,000 in deductions to separate people with hobbies and passive investments from those involved in serious business operations. As a result of that distinction, the percentage of small-business owners in upper-income tax brackets is slightly larger than it would have been without that floor.
Although it has been more than a year since the Treasury Department published the report, Darrell Jordan, a spokesman for Graves, said the Republicans believed it was important to speak up because the debate over small businesses is an important part of the larger debate over the soon-to-expire 2001 and 2003 (PL 107-16, 108-27) income tax cuts.