Watch out for wasteful tax giveaways disguised as help for ‘small business’

Photo by Jeff Turner / CC BY 2.0
Photo by Jeff Turner / CC BY 2.0

Last week a press release from Governor Fallin advertised that she was participating in the “Bring Small Businesses Back Bus Tour” when it came to Oklahoma City. This tour is sponsored by the “Job Creators Network”, an association of corporate leaders started by the former presidential candidate Herman Cain and one of the founders of Home Depot. Governor Fallin’s press release especially focused on promoting H.R. 5374, a proposal by Illinois Republican Congressman Randy Hultgren that he calls the “Bring Small Business Back Tax Reform Act.”

Rep. Hultgren’s legislation would enact a large tax cut for “pass-through income” — the term for business income that is reported on the personal tax returns of the business owners. Business owners typically choose to pass through this income so they can pay a lower personal income tax rate than they would if it was taxed as normal business income. It’s already a lucrative tax break that is estimated to reduce federal tax revenues by more than $100 billion per year.

Congressman Hultgren’s bill would supersize this tax break. He would allow business owners to pay a 10 percent rate on their first $150,000 of income and a 20 percent rate on income between $150,000 and $1 million. For the wealthiest business owners, making upwards of $415,000 per year, H.R. 5374 would cut their top marginal tax rate almost in half (from the current 39.6 percent). These business owners would be paying a lower marginal rate than the 25 percent paid by a median income household making about $52,000 per year. The result is that many business owners would be allowed to play by a different set of rules and pay far less in taxes than their own employees.

[pullquote]“The result is that many business owners would be allowed to play by a different set of rules and pay far less in taxes than their own employees.”[/pullquote]

If this sounds familiar, you may remember that exempting pass-through income from state personal income tax was a major part of the tax cut plan enacted in Kansas in 2012 — the same plan that has damaged the state’s bond rating, slashed school funding, resulted in a worse state economy than before the tax cuts, and made Kansas Governor Sam Brownback the least popular governor in the U.S.

The pass-through tax break is also not limited to “small businesses.” One study estimates that more than 70 percent of pass-through income goes to big businesses with over $10 million in annual revenues; another study found 69 percent of pass-through income goes to the wealthiest 1 percent of American households.

It’s a strange model to want to emulate, but unfortunately that hasn’t dissuaded Governor Fallin, corporate lobbying groups like the Job Creators Network, or Donald Trump, whose tax plan similarly features a huge tax cut for pass-through income. If these ideas move forward on the federal level, or if tax cuts for pass-through income show up on the agenda of state lawmakers, we need to see them for what they are — an attempt to shift the responsibility for paying taxes off business owners and onto middle-class working families. That’s no help to small business, and it’s no recipe for a thriving economy.

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Gene Perry worked for OK Policy from 2011 to 2019. He is a native Oklahoman and a citizen of the Cherokee Nation. He graduated from the University of Oklahoma with a B.A. in history and an M.A. in journalism.

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