With the so-called "fiscal cliff" quickly approaching at the end of the year, small-business owners on Thursday told a House subcommittee that the Obama administration's tax proposal would hurt the nation's leading job providers and prevent them from hiring or increasing wages and benefits.
At a hearing of the House Small Business economic growth, tax and capital access subcommittee, its chairman, Rep. Joe Walsh, Illinois Republican, warned that even though the president's plan would only raise taxes for about 3 percent of small businesses, that adds up to 940,000 companies, and the some $500 billion in tax increases could lead to more than 700,000 jobs lost.
"While there is broad agreement that allowing all of the tax relief enacted in 2001 and 2003 to expire is inappropriate and should be avoided, there is wide disagreement on the composition of an extension and what it means for small business," Mr. Walsh said.
Meanwhile, the subcommittee's ranking member, Rep. Kurt Schrader, Oregon Democrat, called for comprehensive tax reform that would give these small businesses long-term certainty, rather than having to rely on extensions of the Bush tax cuts every few years.
"Small firms are the drivers of the nation's economy, so the cost of collecting taxes should not be put on them," Mr. Schrader said.
"Small firms depend on tax incentives to offset costs of innovation and expansion," he added. "While I support temporary tax provisions and extenders because they are critical for small businesses, their temporary nature causes uncertainty. Not knowing whether these tax provisions will be renewed makes planning for future growth very difficult for small businesses."
Following the hearing, Small Business Committee Chairman Sam Graves, Missouri Republican, announced the full committee would hold a hearing on the issue Sept. 20.
The Obama administration has called for tax increases on individuals earning more than $200,000, in many cases rising to 39.6 percent from 35 percent, among other new taxes, but that would hit many small businesses.
This includes a growing number of small businesses registered as so-called "pass-through" entities, which means they file under the owner's personal taxes, rather than as a corporation.
Pass-through entities, including Subchapter S and LLC, are designed to protect owners who can't afford the expense of becoming corporations from frivolous lawsuits against their personal property.
The number of pass-through companies nearly tripled to 31.8 million by 2008 from 1980, and Ernst & Young reports that 90 percent of all U.S. businesses are pass-through entities.
Small-business owners are calling for help.
While these small-business owners aren't thought of as millionaires and billionaires, many do make $200,000 or more, so their businesses would be taxed at the top rate.
The Tax Foundation, a Washington-based research group, found that the top 2 percent of private businesses pay 40 percent of tax increases.
"These are the most successful, growing and profitable firms, that are key to America's economic recovery," Tax Foundation President Scott Hodge said. "In every sense of the word, this would amount to a 'success tax' on our best and brightest entrepreneurs."
But, when it comes to accessing the money, most small-business owners invest it back in their companies and don't use it for personal finances.
"What is critically important to understand is that profits in a business incorporated as a Sub S or LLC entity do not translate to cash in the pocket of the owner," Theresa Kern, owner of MA Steel Erectors, a subcontractor based in Palos Heights, Ill., told the committee. "But a loss in a business nearly always requires the owner to either forgo her own salary, or even invest more of her own money into the firm."
"My bank and bonding company will require that I not only pay myself only a minimal amount, but that I leave the profits in the business in order to show a stronger financial position," she added. "All of that nice profit will be reported as income to me, and I will have to pay tax on it, even though I may not have one penny of it in my personal checking account."
Doug Harmon, owner of Twin City Die Castings, a manufacturer based in Minneapolis, said the uncertainty in the tax system is leading to more temporary workers and fewer full-time jobs, as well as wage and benefits freezes.
"For manufacturers like me, this tax cliff, or 'taxmageddon,' is a serious threat," Mr. Harmon said. "Given this uncertainty over taxes and other potential government regulations, instead of hiring new employees, increasingly the die-casting industry is choosing to hire temporary workers to fill their employment needs," he said.
"Furthermore, if their taxes are increased, they will be forced to reduce wages and/or delay wage increases to their employees, as well as impacting their workers' benefit packages," he said.
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