Centrists Worry About Budget's Impact On Small Businesses

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Centrist lawmakers from both parties are expressing unease over the impact of President Obama's budget plan on small business, a politically sacrosanct group that appears to have no easy definition.


Beginning in 2011, Obama's budget would raise about $1 trillion in taxes on wealthier earners, defined as individuals making more than $200,000 and households pulling in at least $250,000. Treasury Secretary Geithner fanned out across the Capitol this week to defend the budget against tough GOP criticism, continually pointing out that only a tiny percentage of small-business owners would get hit with a tax increase.


"Now, I just want to pause here for one second," Geithner told the House Budget Committee Thursday, his third appearance on Capitol Hill in three days. "Those proposed changes in tax rates would apply to only 2 to 3 percent of small-business owners across the country, only 2 to 3 percent. Ninety-five percent of small-business owners ... have incomes below that threshold of $250,000."


The figures aren't exactly clear to most members of Congress either, including lawmakers on the tax-writing panels that will ultimately have to shepherd Obama's proposals.


A staunch small-business advocate, Sen. Blanche Lincoln, D-Ark., said she remains unclear about the impact of Obama's tax increases. "We haven't seen too much detail on that," she said. "I'm still trying to verify that," added Senate Small Business ranking member Olympia Snowe, another key swing vote.


Geithner appears to be using data compiled by the Tax Policy Center, a joint venture of the Brookings Institution and Urban Institute. According to a Feb. 25 analysis, about 4.2 million tax filers reporting small-business income -- defined as income from a sole proprietorship, farm proprietorship, partnership, S corporation or rental income -- earn at least $200,000, out of 150.2 million total tax filers. That amounts to about 2.9 percent, which tracks with Geithner's testimony.


The numbers "can cut both ways," a Democratic aide said. Using TPC data, Ways and Means ranking member Dave Camp estimated more than 3 million small businesses earning more than $250,000 would see a tax increase.


Calculated another way, only 663,000 out of 34.2 million tax filers reporting business income fall into the 33 percent and 35 percent tax brackets, the TPC found, which comes out to about 1.9 percent -- another figure used by Geithner. Under Obama's budget, those brackets would snap back to the pre-2001 rates of 36 and 39.6 percent, respectively.


On the other hand, Republicans cite a 2007 Treasury Department analysis that pegged the number of small business tax filers in the top two income brackets at 2.1 million, or 8 percent of the total 27.5 million. Similar to TPC data, Treasury defines small businesses as those taxed at the individual level after earnings flow through to the owner. When the top 39.6 percent tax rate was lowered to 35 percent in 2001, 75 percent of those benefiting were small businesses, the Treasury report says.


Rep. Ron Kind, D-Wis., a member of the Ways and Means Committee, said he was waiting for some clarity on the figures but remains concerned about the impact on small business.


"They're the ones that are going to be able to expand and hire faster than anyone ... so I think we ought to be sensitive," Kind said. "If you talk to either side, you get two different worldviews. I heard some of my Republican colleagues say 75 percent of small businesses are going to get smacked by a tax increase, and yet you talk to Geithner and people at Treasury, and they say 1.9 percent of small businesses."


Kind appeared to be leaning toward his party's definition arguing Republicans have taken a more expansive approach. "They include in the definition of small business the CEO on a board getting compensation. ... The fact that [former] President [George W.] Bush is still receiving some oil royalties from his old business; he's considered a small business under their definition," Kind said. "That's clearly not what anyone in my area of Wisconsin would consider a small business."


For Republicans, the issue is not what percent of small-business owners would be impacted. It is the jobs that could be lost, as Finance ranking member Charles Grassley, and Sens. Orrin Hatch of Utah and Pat Roberts of Kansas told Geithner at a hearing Wednesday.


They cited a National Federation of Independent Business survey that notes the percentage of small-business owners earning $200,000 or more rises steadily with the number of employees, to the point where 40 percent of all owners with between 20-249 employers fall into that category. By that trend, a sharply higher percentage of owners employing up to 500 workers must earn more than $200,000, the logic goes.


"This is the worry that I get back from my constituents, from the small-business folks. They worry that in order to pay this additional tax burden, they may have to lay off workers, reduce wages or benefits, not hire new employees, pass these costs on to their customers," Roberts said. "None of these are good options."

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Cyra Master

Cyra Master is a W.E.B. Du Bois fellow at the Atlantic. Previously, she was an editor at the nonprofit Center for Law and Social Policy and was a reporter for the New Hampshire Eagle Tribune. She is a graduate of Emerson College.
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