Ways and Means to Talk Small Biz Tax Reform

March 6, 2012

On March 7, the House Committee on Ways and Means will hold the second of two hearings on how accounting rules cause different types of businesses—specifically, publicly-traded and closely-held businesses—to evaluate tax policy choices differently. This hearing will focus solely on the special challenges faced by small businesses and how they confront tremendous complexity in dealing with tax accounting and various choices of entity regimes.

The hearing will examine how the tax code affects closely-held businesses in particular, and how tax reform might improve their ability to grow and create jobs. To this end, the hearing will consider how and under which sets of rules closely-held entities should be taxed, as well as general burdens imposed on closely-held businesses such as high compliance costs and tax rates.

In announcing this hearing, Chairman Dave Camp (R-Mich.) said, “Closely-held businesses – including millions of small and family-owned businesses – form the backbone of our economy, but our current tax code imposes a variety of burdens on them that public companies do not face. Tax compliance costs are especially high for small and closely-held businesses, and complex rules often prevent them from maximizing their ability to invest and create jobs. Higher marginal rates on individuals, as have been proposed by others, would stunt their growth even more. As part of comprehensive tax reform, the Committee must determine how best to reduce tax compliance costs and tax rates on closely-held businesses so that they can devote their resources to innovation and job creation, rather than to tax compliance and tax planning.”

Looking at comprehensive tax reform is critical, and NSBA firmly believes that the only way to ensure fairness, transparency and eased complexity of the U.S. tax code is broad reform.

Unfortunately, the focus has been on solely reforming the corporate tax structure. On Feb. 22, President Barack Obama proposed a major overhaul of the nation’s corporate tax code by lowering the corporate tax rate to 28 percent—currently at 35 percent—one of the highest in the world. At the same time, Obama wants to boost overall revenue from corporate taxation by banning numerous deductions and loopholes that save companies tens of billions of dollars a year on their tax bills.

This proposal fails to ensure parity between small and large business, and small businesses soon could be facing tax rates of up to 40 percent or more. Obama has not yet offered a detailed blueprint for overhauling the personal income tax code other than calling for higher taxes on the wealthiest Americans.

It is unlikely that the Obama Administration and Congress will agree on comprehensive tax reform legislation that can be enacted in advance of the Nov. 2012 elections. Tax reform has been the subject of more than 20 hearings by the House and Senate tax committees during the current Congress. These hearings and various proposals for tax reform by President Obama and others may help shape future tax reform legislation if a consensus can emerge on the need for and the direction of a lasting overhaul of tax laws.