This time of year is dreaded by small businesses – a time when many companies and individuals are finalizing their tax returns. This week, the Small Business Committee held a hearing that examined the many tax challenges for small businesses. The committee explored tax complexity and the high tax burden on small companies, and how they are dealing with these concerns in a tough economy.
Today’s tax code drains precious resources that could be used to grow these companies and create jobs. Unfortunately, the burden on small businesses has actually grown over the last few years.
Because of the “fiscal cliff” deal in January of 2013, when President Obama called for higher taxes, rates are higher for individuals at higher income levels. This translates to higher taxes for many small companies, because a majority of them file their taxes as individuals. The deal also raised taxes on capital gains and the estate tax.
According to the National Federation of Independent Business, 75 percent of businesses are pass-through entities subject to individual income tax rates. These businesses aren’t subject to corporate tax rates, but they are subject to individual rates, and the 2013 tax increases created new hardships. The burden of higher rates is compounded by Obamacare, as many small businesses are paying and preparing for new taxes, such as the health insurance tax, the employer mandate tax, the medical device tax, the Medicare tax on investment income, and many others.
One Indiana small business owner, Juanita Melton, commented through Small Business Committee’s interactive website, Small Biz Open Mic, that “the new ACA will place an undue burden on us as the 3 new ‘taxes’ – Patient-Centered Outcomes Research ($1 per life); Reinsurance ($65 per life); and HITS (a share of $8 billion dollars in the first year) – are levied against us by the insurance carriers. We cannot continue to absorb the increased costs and therefore will be forced to pass these additional taxes through to our employees, increasing the amount they must pay for insurance. What happened to, ‘There will be no new taxes and no additional cost’ to implementing the ACA?’”
This growing burden for small companies is a big deal. It increases the challenges of compliance and reduces the capital needed to grow a business. Small companies create the majority of new jobs in America, so as these businesses face increasing challenges, the economy continues to lag.
Complexity is a burden that shouldn’t be overlooked. According to a new National Small Business Association (NSBA) survey, tax code complexity remains a significant challenge to small business, with the majority of people saying they spend more than 40 hours per year dealing with federal taxes. Forty percent report spending in excess of 80 hours – two full work weeks – per year on federal taxes.
Small business owner Ron Gates of Austin, Texas, told us last month through Small Biz Open Mic, “Too many laws and regulations for a small business to manage, particularly the insane federal tax code, causes a small business to spend an inordinate amount of time and money on lawyers and CPAs just to comply with the tax code and prepare annual tax returns -whether the business is making any money or not.”
The growing number of tax provisions means that small business owners must spend more resources on compliance rather than growing and creating jobs. Over time, our tax code has become more complex and truly temporary, with tax changes being made just one year ahead, for months at a time or even retroactively.
The cost for this compliance headache is nearly three times greater for small firms than big businesses. According to the Internal Revenue Service’s own National Taxpayer Advocate, there were over 500 changes to the tax code in 2010 alone. That’s an average of more than one change per day that small firms are forced to try to manage.
High tax rates also reduce the capital that small companies would invest back into their companies or create jobs. Higher taxes interrupt small business cash flow, especially since they operate with thin profit margins. Small firms need a functional cash flow for their day-to-day operations like wages, benefits, and utilities. The NSBA survey shows that the overwhelming majority of small businesses – 73 percent – say that federal taxes have a significant to moderate impact on the daily operation of their business.
Because of these challenges, the survey confirms overwhelming support – 67 percent – for tax reform that would reduce both corporate and individual tax rates, coupled with a reduction in business and individual deductions. I applaud efforts to advance the tax reform debate in Washington, and I remain hopeful that Washington can tackle this challenge in the future.
Tax complexity and high rates slow our economy. They unfairly punish success and create another time-consuming burden for small companies who would otherwise be devoting those resources to productive use. As the Committee found during the hearing, creating a tax code that is easier to navigate and promotes growth will benefit small businesses, create jobs and strengthen the economy.
Rep. Sam Graves (R-MO), who serves Missouri's 6th congressional district, is chairman of the House Small Business Committee.