Small businesses need tax reform
April 15, 2013
Rep. Sam Graves
Here we are on Tax Day, the time of year to rightfully reflect on our nation’s tax system. Most Americans immediately experience tax pain in terms of how much they pay to Uncle Sam. For our nation’s small businesses, the complexity of compliance adds insult to injury.
Policymakers in Washington must take note of this. Tax complexity and inequity negatively affect our economy, because it creates another time-consuming, resource-burning burden for small companies who would otherwise be devoting those assets to productive use.
Everyone acknowledges the importance of small business to our economy. They employ about half of all private sector employees and create more than half of the non-farm private gross domestic product. Despite their significance to our economy, small businesses are not favored in our burdensome tax code. The cost of tax compliance for small businesses is nearly three times larger than big businesses. And the growing number of provisions, along with the fact that small firms frequently do not have an in-house accountant or tax attorney, means that small business owners must hire outside experts or add those duties to another employee’s workload.
On top of the confusion around the tax code’s complexity are constant changes to the law. Too often, tax provisions are being extended for one year, months at a time, or even retroactively. This tax uncertainty, coupled with new regulations and a weak economy, has made it difficult for small firms to plan or grow their companies.
In a recent Chamber of Commerce survey, eight in ten small businesses support comprehensive tax reform. They also indicate that they want tax reform to address the issue of complexity (52 percent), more than lower rates (27 percent). Yes, small business owners want lower rates so they can retain and reinvest more of their company’s revenue, but tax compliance takes up precious time and resources that could be devoted to growing the company.
According to the 2013 Small Business Taxation Survey from the National Small Business Association, almost 40 percent of owners report spending 80 hours or more per year on federal taxes — that’s two full work weeks spent just on federal taxes.
To address these issues, Washington should enact comprehensive tax reform this year. And to specifically help small businesses, any reform proposal must include reform of individual rates, and not just corporate rates. Why? Because about 75 percent of all businesses are organized as pass-through entities, such as LLCs and S corporations. These are companies that pay their taxes on their individual tax returns at individual rates, rather than on a corporate return. This is business income that is not the owner’s salary, but rather income that could be reinvested in the business. These businesses have a significant impact on the economy because, together, pass-throughs account for half (54 percent) of all business net income.
Creating a tax code that is easier to navigate and promotes growth is a top priority for the House Small Business Committee. We’ve held twelve tax-related hearings since 2011 and the need for tax reform is a consistent message that we hear.
Thankfully, this issue is a top priority for Ways and Means Committee Chairman Dave Camp (R-Mich.) . His committee, which has jurisdiction over the tax code, has held over 20 hearings since the start of the 112th Congress focusing on tax reform at all levels.
Last month, Camp issued a tax reform discussion draft for small businesses that includes several approaches. As part of the larger effort to reform the code, Camp’s proposal would make Section 179 expensing for equipment and property permanent; simplify and expand the use of cash accounting for certain small firms; create a unified deduction for start-up and organizational expenses; and provide two options for reform of the Federal tax rules applicable to pass-through businesses.
Last week, our committee held a hearing on tax reform in which Camp testified about his proposals. During his testimony, he said the tax code “ought to be easier to understand and less expensive for small businesses to comply with – because every dollar they aren’t spending on taxes and tax compliance is a dollar they have to invest in equipment, start a new production line, hire a new employee or provide more in wages and benefits.”
I couldn’t agree more.
During the hearing, Sam Griffith, President and CEO of National Jet Company, Inc. in Cumberland, Md., summed up the feedback that we’ve heard from small business. “It is very difficult to plan into the future when there is such uncertainty in the tax code. No one likes a moving target and for the last ten years it has been a nightmare to plan,” he said.
Creating a tax code that is easier to navigate and promotes growth will benefit small businesses and the U.S. economy as a whole. I’m glad to hear that both Camp and Senate Finance Committee Chairman Max Baucus (D-Wyo.) are committed to comprehensive tax reform sooner rather than later. Now is the time for Washington to come together to make sure we get this done. Because small businesses need reform and our economy will see the benefits from it.