The House tax reform bill is now out of committee and headed for a vote on the House floor, and a leading advocate for small businesses says there is a lot to like in this legislation for businesses and individuals but she says there is definitely room for improvement.
Karen Kerrigan is president of the Small Business and Entrepreneurship Council and an influential voice on tax and regulatory policy impacting small businesses. Just last week, she sat to the left of President Trump at a White House meeting on tax reform.
Kerrigan says a number of key provisions are very good, especially dropping the corporate tax rate from 35 percent to 20 percent.
“It’s a really solid bill in terms of lowering rates, making those lower rates permanent, advancing simplicity for small businesses. That was very important, both on the business side and on the individual side,” said Kerrigan.
“We think those lower rates are going to be very helpful to allow them to reinvest more of their capital, more of their profits into their business at the end of the year,” she added.
And tax rates are not the only component that excites Kerrigan.
“If you do have these immediate cuts on the business side and also the expensing piece – you can’t forget about that – full expensing or expanded Section 179 expensing. That’s really going to trigger a lot more investment and a lot more confidence. Then you’re going to see higher growth in the economy as well,” said Kerrigan.
While corporations would see their tax rate plummet more than 40 percent, businesses other than corporations may face a murkier future. While dropping small business taxes to 25 percent, the GOP bill also keeps the top individual rate – through which many small businesses files with the IRS – unchanged at 39.6 percent for those making over a million dollars per year.
So will those businesses, known as pass-throughs, get relief?
“It really depends,” said Kerrigan, who says those making less than a million per year ought to benefit greatly from lower business taxes and lower individual rates. But that relief will not be happening for everyone.
“As it stands, there is a complicated formula, the 70/30 formula, that basically says from a pass-through perspective that 70 percent will get taxed from a wage perspective, which is the individual rate which may be higher for some small business owners. Thirty percent would get that lower rate,” said Kerrigan.
“What we’re trying to do is improve that pass-through rate. So maybe there’s better parity, perhaps 50/50, perhaps 40/60.
“The key right now is allowing more small businesses, particularly those that are in the upper income bracket, to get that 25 percent rate. We think those are resolvable and hopefully we’re going to get to a point where many small businesses are going to benefit from the lower rate,” said Kerrigan.
A major tactical consideration for lawmakers is how to craft the bill so senators can pass it with a simple majority. Senate rules only allow that to happen if the tax bill does not create additional deficits.
The Congressional Budget Office, or CBO, says the House GOP plan would add $1.7 trillion of deficits over the next decade.
Kerrigan pushes back on the CBO in two ways. First, she points out the CBO’s refusal to factor in economic growth in projecting deficits, a policy known as static scoring versus the dynamic scoring that Kerrigan and others believe is more accurate.
“They leave out the reality in terms of dynamic scoring and the impact that incentives and reduction and putting more money back into the private economy has on growth and people’s behavior and business behavior and that drives growth,” said Kerrigan.
Second, Kerrigan says the CBO has a lousy track record with its projections.
“You’ve got to remember the CBO has been notoriously wrong on a whole range of things over the past 5-10 years. If you look at their predictions on Obamacare, how many people would be insured under Obamacare, really wrong on that. The cost of coverage on Obamacare? They’ve been dramatically wrong on that as well,” said Kerrigan.
As the debate heads to the full House floor and begins separately in the Senate, Kerrigan is confident that Republicans are largely headed in the right direction, but she still wants to see it get better.
“We are working on a bunch of issues so that small businesses will be able to keep the value of that lower rate and get that 25 percent rate. It’s a process and we’re at the table and we’re trying to improve this bill as much as possible so that it will have the best effects for small business and for the economy as well,” said Kerrigan.